Construction Loans – How They Work

Construction loans differ substantially from normal home loans so it’s important to understand how these loans work, how the loan is funded and above all how the repayments are calculated.

Construction loans are divided up as per your building contract from the builder. In this building contract you will find a progress payment schedule that details the individual stages of construction and what percentage of the build price is due at each stage.

How Are Construction Loans Funded?

The funding guide below is a practical example of the individual stages and the percentage due of the contract price at each stage.

Stage 1: 5% deposit → Plans Approved By Council
This is the preparation stage. The builder organises approvals with council, trades and materials ready to start the construction. There can be delays with council which is outside your builders control, but they will do what they can to expedite the process. This stage starts once the land settlement has gone through as council needs to see the land title in your name.

Stage 2: 25% Base → Site Works Commence and Slab Poured
Ground breaking moment, there is now progress on your site. The block is prepared for your slab and this could involve cutting and filling your block to make the site level, plus erecting retaining walls. During this time, materials for the next stage may start to arrive and the builder will organise the next set of trades.

Stage 3: 20% Frame → Wall Frames and Roof Trusses Built and Erected
Carpenters will start erecting the frame of your home which will give a clearer picture of the space and feel. This process can happen very quickly depending on whether the framework is pre-constructed and delivered to site in sections. The trusses are usually erected by crane and secured onsite. The frame is also braced and tied down to slab.

Stage 4: 25% Enclosed → Walls Bricked and Roof Covering Completed
Your home will have the outside bricked or clad with timber, depending on the material you have chosen. Your roof will be lined with tiles or corrugated metal and windows & doors will be fitted to make your home weather tight. This will now reduce wet weather delays. This stage is also known as lock up as the house can now be ‘locked’.

Stage 5: 20% Fixing → Internal Fitout Commences Including Fixtures and Fittings
If not completed in the previous stage the electrical work and plumbing will be completed; walls and ceiling are sheeted. Bathroom and kitchens will be installed and interior finishes such as painting, floor coverings, lighting and window coverings. Your house is now very much looking like a home!

Stage 6: Practical Completion → Property Completion / Handover Inspection
If the builder is handling the driveway, turf and landscaping, these items will be completed and any other interior fitouts. Appliances will be installed just before handover to guard against theft. The site manager will walk you through the home to check off the home is completed satisfactorily and council will complete the final inspection to make sure its meets the relevant building codes.

Do I Pay Interest On The Entire Loan From The Start?

Think of the loan as one giant credit card for construction. You only pay interest on what is drawn down for each progress payment stage. The percentages in each of the stages can vary slightly from builder to builder as per the recommendations by the HIA, so don’t be concerned if your builder varies slightly from the example attached. The builder will detail the progress payment schedule in the construction contract so you know how much each stage will be. You will only pay interest as each stage completes rather than paying interest on the entire build right from the start.

Let’s look at an example of a $300,000 construction loan. Detailed below is how the repayments are made assuming an interest rate of 7% and a month gap between each payment of each stage. Note that the repayments are always interest only throughout the build process:


Stage 1 – Deposit 5%

Stage 2 – Base 15%

Stage 3 – Frame 20%

Stage 4 – Enclosed 25%

Stage 5 – Fixing 20%

Stage 6 – Completion 15%






















TOTAL $5,514pm

You can see interest is charged on what has been drawn down at the time of each progress payment. Bear in mind sometimes a stage may complete fairly quickly and it’s not uncommon to receive two progress payments in the same month. Once the construction loan has been finalised the loan will revert to principal and interest and you loan term will start (e.g. 30yr term). If the construction loan is for investment, you can elect to have the repayments as interest only to maximise your cash flow.

I Don’t Think I Can Afford Rent & Repayments, What Can I Do?

Paying rent and building at the same time for most can be too much of a stretch financially. What we recommend is keeping back from your deposit enough to cover the total repayments during the construction process as your repayment buffer. For the example above $6,000 should be sufficient and what is not used at the end of construction can go straight into the loan to reduce interest.

Other options is to stay with family or friends throughout the build process to minimise rent or board. We have had clients cash in holidays from their employer to help where needed.

For more information regarding construction loans, talk to us today by calling the number above, online chat or completing the contact us form.

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