How construction loan progress payments work in Australia
Building a new home is exciting, but the finance works differently from buying an established property. With a construction loan, funds are generally released in stages as building work progresses, rather than in one lump sum at settlement.
These are known as construction loan progress payments. Understanding how they work before signing a building contract can help you prepare for lender requirements, changing repayments and potential delays during your build.
Before construction begins, lenders generally assess the proposed building contract, plans, specifications and the property's expected value once completed. Getting the finance organised early is just as important as understanding when progress payments are released.
Whether you're planning to build on the Gold Coast or elsewhere in Australia, here's what you need to know about how construction finance works.
What are construction loan progress payments?
Construction loan progress payments are amounts released by your lender as your builder completes agreed stages of construction.
Instead of advancing the entire construction loan upfront, the lender releases funds progressively, subject to the conditions of your loan approval and building contract.
Your building contract will usually set out a progress payment schedule, including the milestones at which your builder expects to be paid.
Most lenders review the proposed fixed-price building contract and progress payment schedule as part of the initial finance assessment, helping identify potential issues before construction begins.
Why this matters: Having your proposed building contract reviewed as part of the lending process before signing can help ensure the project meets the lender's requirements.
This is one reason speaking with a mortgage broker early in the building process can be valuable.
You can learn more about deposits, lender requirements and finance options on our construction loans page.
The five main construction loan payment stages
Most residential building contracts follow five broad construction stages. The exact milestones, payment percentages and definitions vary between builders, contracts and lenders.
Base or slab stage
This stage generally includes site preparation, foundations and the concrete slab or other agreed base works.
Once the contracted milestone is reached, your builder may issue a progress payment claim. Depending on your finance arrangements, this stage may be funded partly or entirely from your own required contribution before the lender begins releasing construction loan funds.
Frame stage
The home's structural framework is completed to the standard required under the building contract.
The lender assesses the progress payment request and may require confirmation that the relevant work has been completed before releasing funds.
Lock-up stage
The home reaches the agreed lock-up milestone, commonly involving the roof, external walls, windows and external doors.
What qualifies as lock-up depends on the contract. Your lender may require an inspection before authorising the next payment.
Fixing or fit-out stage
Internal construction progresses, including items such as plastering, cabinetry, plumbing, electrical fittings and other fixtures.
This is also a useful point to confirm which items are included in your building contract and which may require separate funding.
Completion stage
The builder finishes the contracted work and submits the final payment claim.
Before releasing the final funds, the lender may require an inspection, relevant completion documents and evidence of appropriate insurance.
Your obligations regarding defects, handover and final payment should also be checked against your building contract.
Remember: These are common stages, not a universal payment schedule. Your contract may use different milestones or include additional stages.
How does the builder actually get paid?
Although the exact process varies between lenders, a typical construction loan progress payment works as follows:
- The builder completes an agreed construction stage.
- The builder issues a progress payment invoice or claim.
- You review the claim and confirm that the required work has been completed.
- The lender receives the documentation and may arrange an inspection or request additional evidence.
- Once the lender's requirements are satisfied, the payment is released, generally to the builder.
An important point is that your required contribution is generally used before the lender begins releasing construction loan funds.
Payment processing is not always immediate. It's worth understanding the lender's documentation requirements and expected processing time before construction begins.
Why construction loan approval should happen before signing a building contract
One of the most important parts of arranging construction finance happens before building work begins.
Most lenders require a proposed fixed-price building contract, plans and specifications as part of the construction loan application.
The lender will also generally arrange a valuation based on the expected value of the property once construction is complete.
This assessment can often be completed using an unsigned building contract, allowing the lender to review the proposed project and confirm whether it meets its requirements before you sign.
Once the finance has been approved, the lender will require the signed fixed-price building contract and supporting documents, such as the final plans and relevant builder's insurance, before construction loan funds are released.
Why speak to a mortgage broker before signing?
Martin can help you understand the documentation, valuation and lending requirements for your proposed build before you commit to a building contract.
This gives you an opportunity to address potential finance issues early, rather than discovering them after construction has started.
When does the lender start releasing construction funds?
Another important part of construction finance is understanding when your own money needs to be contributed.
If you're contributing funds towards the build, lenders generally require your contribution to be used before they begin releasing construction loan funds.
Example: Your contribution towards a $500,000 build
Imagine your fixed-price building contract is $500,000 and you're contributing 20% towards the construction cost.
Your contribution would be $100,000, with the remaining $400,000 funded through the approved construction loan.
The $100,000 would generally be used through the builder's deposit and early progress claims, such as the base or slab stage, before the lender begins releasing its construction loan funds.
The exact timing depends on the contract, your loan approval and the lender's requirements. This example assumes the contribution relates specifically to the $500,000 building cost.
Understanding this process helps you plan when your savings or other available funds will be needed during construction.
It also highlights why your overall project budget, loan structure and building contract should be considered together before work begins.
Do you pay interest on the full construction loan during the build?
Generally, interest on a construction loan is calculated on the amount already drawn down, rather than the entire approved construction facility from day one.
As each lender-funded progress payment is released, the outstanding balance increases, which usually means the interest charged increases too.
For example:
If you have an approved construction facility of $400,000 but only $100,000 has been drawn from that facility, interest will generally be calculated on the $100,000 outstanding balance.
As more loan funds are released to the builder, the balance increases.
Many construction loans offer interest-only repayments during the building period. Once the build is complete, repayments commonly move to principal and interest, depending on your loan arrangement.
Your repayments after construction may therefore be considerably higher than those at the beginning of the project.
Use our home loan calculators to explore potential repayments. Standard repayment calculators may not model progressive construction drawdowns, so the results should be treated as estimates.
What happens if construction costs increase?
Construction loan approval is based on the lender's assessment of your financial circumstances, the property and the proposed building project.
It doesn't automatically mean more funds will be available if your construction costs increase.
Additional costs can arise from site works, upgraded materials, building variations, fixtures or items excluded from the original quote.
Before starting, consider whether your overall budget accounts for:
- Site preparation and possible additional ground works.
- Driveways, fencing, landscaping and window coverings.
- Relevant council fees and other project costs.
- Changes or upgrades requested during construction.
- A financial buffer for unexpected expenses.
If your project changes significantly, the lender may need to reassess the finance. Additional borrowing is not guaranteed.
What if construction is delayed?
Building delays can affect more than your expected move-in date.
You may need to keep paying rent or another mortgage while also making interest payments on your construction loan.
Lenders may also have timeframes for commencing construction, completing the build or drawing down approved funds.
If your project exceeds those timeframes, an extension or additional approval may be required.
Before building begins, ask how your lender handles delays, extensions and changes to the anticipated completion date.
What should you check before signing a building contract?
Your building contract is a major financial commitment. The construction details and lending arrangements need to work together.
Before signing, make sure you understand:
- The total cost of the project, including exclusions.
- Your available deposit or equity contribution and when it will be required.
- Whether the lender has reviewed the proposed fixed-price building contract.
- The lender's completed-property valuation and approval requirements.
- The builder's proposed progress payment schedule.
- What documents and insurance evidence will be required before funds are released.
- How repayments will change during and after construction.
- How unexpected costs or delays could affect your budget.
If you're still establishing your borrowing position, our home loans page explains the broader lending process.
Building your first home? Visit our first home buyer page for information about deposits, pre-approval and preparing to buy or build.
Construction loans on the Gold Coast
Whether you're building on vacant land, purchasing a house and land package or planning a knockdown rebuild, the right construction finance depends on more than the advertised interest rate.
Different lenders have different requirements for builders, contracts, valuations, deposits and progress payments.
Martin Robinson at The Mortgage People helps clients on the Gold Coast and across Australia understand their construction lending options and compare suitable lenders.
You don't need to wait until every detail of your build is finalised before discussing the finance. Speaking to a mortgage broker before signing a building contract can help identify potential issues while you still have options.
Planning to build? Let's talk about the finance.
Whether you're still comparing builders or already have a proposed construction contract, Martin can help you understand your borrowing position, lender requirements and next steps.
Start with a free initial conversation about your plans.
Book a free chat with Martin →General information only. Lending criteria, progress payment requirements, loan terms and approval conditions vary between lenders. Building contract obligations and applicable state requirements should be confirmed with appropriately qualified professionals. Examples are illustrative and do not represent a lender offer.
