Everything you need to know about Construction Loan Features

A construction loan releases funds progressively as your build reaches completion milestones, meaning you only pay interest on the amount drawn down at each stage.

This approach differs fundamentally from a standard home loan where the full amount settles on a single date. With construction finance, your lender holds the approved loan amount and releases it in instalments as your registered builder completes defined stages such as base, frame, lock-up, and final completion. Between drawdowns, you typically make interest-only payments on whatever portion has been released, not the total loan amount. That structure keeps your repayments lower during the build period, though you need to understand how progressive payments, inspection requirements, and contract types shape the overall cost and timeline.

Progressive Drawdown and Interest Calculation

You pay interest only on funds already released, not on the full loan amount sitting with the lender. Consider a scenario where you secure construction finance of $650,000 for a land and build project. After the base stage is complete and inspected, the lender releases $130,000. Your interest-only repayment during that period applies to $130,000, not the full $650,000. When the frame stage is approved and another $195,000 is drawn, your repayments adjust to cover $325,000. This continues through lock-up, fixing, and completion until the entire amount is drawn and the loan converts to principal and interest repayments on the full balance.

Most lenders apply a slightly higher margin during the construction phase compared to their standard variable rates, typically between 0.10% and 0.50% above the equivalent ongoing rate. Once construction completes and the loan converts to a standard construction to permanent loan, that margin usually drops away. The interest saved during construction by only paying on drawn amounts often outweighs the temporary rate difference, particularly on builds that extend beyond six months.

Progress Payment Schedule and Inspection Requirements

Lenders release funds according to a progress payment schedule that aligns with defined construction stages, not calendar dates. Your builder submits a claim once a stage is complete, the lender arranges a progress inspection, and if the work meets the required standard, funds are released directly to the builder. The inspection is typically conducted by a quantity surveyor or licensed building inspector engaged by the lender, and you pay a progressive drawing fee for each inspection, usually between $300 and $600 per stage depending on the lender and property location.

In Bulleen, where many builds occur on subdivided blocks near the Yarra River or elevated sites around Banksia Street, inspection timing becomes particularly important if your site has access constraints or weather delays. A delay in inspection approval pushes back the drawdown, which can leave your builder waiting for payment and potentially slow the build timeline. Some lenders offer five-stage schedules, others use six or seven stages depending on the complexity of the build. Clarifying the exact schedule and inspection process before you commence building avoids confusion when your builder expects payment and the lender has not yet released the funds.

Fixed Price Building Contracts and Cost Plus Arrangements

Most lenders will only approve construction finance against a fixed price building contract with a registered builder. The contract must specify the total build cost, itemise inclusions and exclusions, and outline the progress payment schedule. This gives the lender certainty that the loan amount will cover the build and protects you from cost overruns that exceed your approved borrowing capacity.

A cost plus contract, where you pay the actual cost of materials and labour plus a builder's margin, is more difficult to finance through mainstream lenders. Some specialist construction lenders will consider cost plus arrangements for custom design projects or owner builder finance scenarios, but they typically require a larger contingency buffer and may apply higher rates or fees. If you are planning a custom home in Bulleen with specific architectural features or materials that make a fixed price contract impractical, expect to set aside at least 10% to 15% above your estimated build cost as a contingency before a lender will proceed.

Council Approval and Commencement Timeframes

Your construction loan approval is conditional on obtaining council approval for your development application before settlement. Most lenders also require you to commence building within a set period from the disclosure date, typically six to twelve months depending on the lender's policy. If your council plans are delayed or you cannot start within that window, the approval may lapse and you will need to reapply, which can trigger a new assessment of your borrowing capacity and the prevailing interest rate.

In Bulleen, where council approval through Manningham City Council can take several months depending on the size and design of the build, submitting your development application early in the finance process reduces the risk of approval expiry. Some lenders will extend the commencement period if you can demonstrate that the delay is due to council processing times rather than a change in your circumstances, but this is not automatic. If you are purchasing land separately and planning to build later, consider whether a land and construction package or a two-stage settlement structure suits your timeline and budget better than holding the land on a standard mortgage while waiting for council approval.

Land and Construction Packages Versus Separate Land Purchase

A land and construction package combines the land purchase and build cost into a single loan with one settlement. The lender values the land and the proposed build together, and your deposit applies to the total project cost. This structure works well for house and land packages offered by developers in new estates, or where you have already secured suitable land with a long settlement period that allows time for council approval and contract finalisation.

If you purchase land separately using a standard home loan or investment loan, you will need to refinance into construction finance before you start the build. That refinance triggers a new application, valuation, and approval process, and your borrowing capacity may change depending on interest rate movements or any changes to your income or commitments since the original land purchase. For buyers in established areas of Bulleen where land is purchased at auction or through private sale with a 60 or 90-day settlement, starting the construction finance application immediately after securing the land keeps the timeline aligned and reduces the risk of delays once council approval is obtained.

Renovation Finance and Progress Payment Structures

Construction finance also applies to major renovations where the work is staged and requires progressive funding. Lenders treat a house renovation loan the same way they approach new builds, requiring a fixed price contract with a registered builder, council approval if the work involves structural changes or extensions, and progress inspections at each drawdown stage. The difference is that you continue living in the property or holding it as an investment while the work proceeds, so the lender values both the existing structure and the proposed improvements when assessing the loan amount.

Consider a buyer who owns a 1970s home in Bulleen near the Templestowe Village precinct and plans a $250,000 renovation including a second-storey addition and kitchen rebuild. The lender will value the property in its current condition, estimate the end value once the renovation is complete, and approve a loan amount based on the lower of the two figures plus the renovation cost, subject to their maximum loan-to-value ratio. If the current value is $900,000 and the end value is projected at $1,150,000, the lender may approve up to 80% of the end value, or $920,000, minus the amount already owing on the existing mortgage. The renovation cost is drawn progressively as each stage is completed, and the buyer makes interest-only payments on the drawn amount during construction before converting to principal and interest repayments once the work is finished.

Owner Builder Finance and Specialist Lender Requirements

If you plan to act as an owner builder, your construction finance options narrow significantly. Most mainstream lenders will not approve owner builder finance due to the increased risk of cost overruns, delays, and incomplete work. Specialist lenders who do offer this product typically require a larger deposit, often 20% to 30%, and impose stricter conditions around your building experience, the tradespeople you engage, and the progress payment structure.

You will need an owner builder permit from the Victorian Building Authority, comprehensive building insurance, and detailed cost breakdowns for each stage of the build including quotes from plumbers, electricians, and other sub-contractors. The lender may also require you to hold a contingency reserve of 10% to 20% of the build cost in accessible savings before they approve the loan. For most buyers in Bulleen, using a registered builder under a fixed price contract provides access to a wider range of construction loan options at lower rates, even after accounting for the builder's margin.

Call one of our team or book an appointment at a time that works for you to discuss which construction finance structure suits your build timeline and budget.

Frequently Asked Questions