How progress payments work on a construction loan

How a construction loan works

The lender values the property as if the build were complete and approves a loan based on the land and the building contract. Instead of paying the builder upfront, the lender releases funds in stages, called progress payments or drawdowns, as each stage is finished.

Typical progress payment stages

• Deposit: usually paid when the building contract is signed.
• Base or slab: footings and slab completed.
• Frame: the frame is up and inspected.
• Lock-up: external walls, windows and doors installed.
• Fixing: internal fit-out such as plasterboard and cabinetry.
• Practical completion: the build is finished and ready for final inspection.

Step by step

• Get pre-approval so you know your budget before you sign with a builder.
• Buy the land, or use land you already own.
• Sign a fixed-price building contract and get council-approved plans.
• The lender orders a valuation and issues formal approval.
• Your builder issues an invoice at each stage and the lender pays it after checking the work.
• At completion, the loan usually changes to principal and interest repayments.

What lenders need

• A fixed-price building contract with a licensed builder.
• Council-approved plans and specifications.
• Home warranty insurance, for example, the Home Building Compensation Fund in NSW.
• Quotes for any work outside the contract, such as landscaping or a pool.

Things to watch

Cost increases or variations above the contract price usually have to be paid from your own funds before the lender releases further payments. Allow a buffer and check how long the lender allows for the build to be completed. Owner-builder projects and larger developments are assessed differently and have fewer lender options.