Top tips to manage a construction loan from start to finish

Understanding how progress payments work

Construction finance releases funds in stages as your builder completes specific milestones, not as a single upfront amount. You only pay interest on the amount drawn down at each stage, which keeps your holding costs lower during the build. Most lenders follow a progress payment schedule tied to completed stages such as base, frame, lockup, fixing, and practical completion. Your builder invoices the lender after each stage is finished, the lender arranges a progress inspection to confirm the work is done, and then releases the next payment directly to your builder.

In Penrith, where a large portion of new housing sits in the growth corridor around Caddens and Jordan Springs, we regularly see construction timelines stretch from six months to over a year depending on weather, labour availability, and council approval delays. Each extra month adds holding costs, so knowing exactly when each drawdown happens and what triggers it keeps you in control of your budget.

Setting up your loan structure before the first drawdown

Before the first progress payment goes out, your lender calculates the loan amount based on the lower of the purchase price or valuation for the land, plus the fixed price building contract. Most lenders advance funds on an interest-only repayment basis during construction, which means you are only covering the interest charged each month rather than paying down principal. Once construction is complete and you receive the Occupancy Certificate, the loan converts to a standard home loan with principal and interest repayments.

Consider a buyer purchasing suitable land in Kingswood and building a custom home under a fixed price building contract. The land costs $350,000 and the building contract is $450,000, giving a total project cost of $800,000. The lender approves 90% of the land value and 90% of the contract price, which means $315,000 for the land and $405,000 for construction. The borrower pays the deposit on the land and covers the 10% shortfall on the build, then the lender releases construction funds across five stages as the builder completes each phase. During the build, the borrower pays interest only on the amount drawn down, which starts at $315,000 and increases with each drawdown.

Tracking each stage and coordinating inspections

Once construction starts, your builder will invoice the lender after completing each stage. The lender then arranges a progress inspection, usually conducted by a third-party assessor, to confirm the work meets the contract specifications. If the inspection passes, the lender releases the payment within a few business days. If the inspection identifies incomplete or defective work, the payment is held until the builder rectifies the issues.

Delays at this point are common, especially when builders submit invoices before the work is genuinely finished or when inspection reports identify problems that take weeks to resolve. Staying in contact with your builder and your broker during each stage means you know when an invoice has been submitted, when the inspection is scheduled, and whether any issues have been flagged. Most lenders charge a Progressive Drawing Fee each time they release funds, typically between $250 and $400 per drawdown, so understanding how many drawdowns your contract includes helps you budget for those costs upfront.

Managing interest costs as drawdowns increase

Because you only pay interest on the amount drawn down, your monthly repayments increase after each progress payment is released. If your initial drawdown for the land is $315,000 and your next drawdown for the base stage is $80,000, your interest calculation jumps from $315,000 to $395,000. At current variable rates, that could mean an increase of several hundred dollars per month in interest charges.

Planning your cashflow around these increases prevents surprises. We regularly see buyers in Penrith who budget based on the interest cost of the land component only, then find themselves stretched when the first two or three construction drawdowns hit within a few months of each other. Asking your lender or broker to provide a drawdown schedule with estimated interest costs for each stage gives you a clear picture of what to expect and when.

What happens when construction runs over time

Most lenders require you to commence building within a set period from the Disclosure Date, usually six months. If your development application or council approval takes longer than expected, you may need to apply for an extension or resubmit your construction loan application with updated plans. Once construction starts, most lenders allow up to 12 months for completion, though some extend this to 18 months depending on the project scope.

If your build runs past the agreed completion date, the lender may extend the construction phase or convert the loan early and start charging principal and interest repayments even though you have not moved in yet. In some cases, lenders charge higher interest rates or additional fees during the extension period. Keeping your builder to the agreed timeline, or at least staying informed about delays as they arise, means you can discuss extensions with your lender before the deadline passes rather than scrambling at the last minute.

Finalising the loan once construction is complete

Once your builder reaches practical completion and you receive the Occupancy Certificate from council, your construction loan converts to a standard home loan. The lender conducts a final valuation to confirm the completed property meets the loan-to-value ratio agreed at the start, then switches your repayments from interest-only to principal and interest. If the final valuation comes in lower than expected, the lender may require you to contribute additional funds to bring the loan back within their lending criteria.

In a scenario like this, a buyer in Penrith builds a new home and receives the Occupancy Certificate, but the final valuation is $20,000 lower than the original estimate due to market softening. The lender requires the borrower to contribute $20,000 to reduce the loan amount and meet the original loan-to-value ratio. Having a buffer in your savings or discussing valuation risk with your broker before construction starts means you are not caught short at settlement.

If you are managing a build in Penrith or planning to start one, call one of our team or book an appointment at a time that works for you. We work with buyers across the Penrith region, including Kingswood, Jordan Springs, and Caddens, and we will walk you through every stage of your construction finance from application to final settlement.

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