Construction finance operates differently from a standard home loan because the funds are released progressively as your build reaches specific milestones, not as a single upfront amount.
If you're planning to build in Coburg, whether on a knockdown-rebuild site near Pentridge Village or on vacant land closer to the Merri Creek corridor, understanding how construction funding is structured will help you manage cash flow and avoid delays during the building phase.
How Construction Loan Funds Are Released
Construction loans disburse funds in instalments as your builder completes defined stages of the project. Lenders typically release payments after an inspection confirms that each stage has been completed to a satisfactory standard. The number of stages varies, but most lenders work with between four and six progress payments, starting with a deposit or base stage payment and concluding with final completion.
You only pay interest on the amount drawn down at each stage, not the full loan amount. During construction, most borrowers opt for interest-only repayment options, which keeps servicing costs lower until the build is complete and the loan converts to a standard home loan structure.
What a Typical Progress Payment Schedule Looks Like
A standard progress payment schedule might include payments at base stage (around 10% to 15% of the contract value), frame stage (another 15% to 20%), lock-up stage (a further 20% to 25%), fixing stage (around 20% to 25%), and practical completion (the remaining balance). Each lender structures this slightly differently, and some builders prefer milestone-based schedules tied to specific elements like roof completion or plastering rather than generic stage descriptions.
Consider a Coburg builder working on a custom home on a 450-square-metre block. The fixed price building contract totals $550,000, and the lender approves a construction to permanent loan with a progressive drawdown. At base stage, the lender releases $82,500. After the frame is up and inspected, another $110,000 is drawn. By lock-up, when the roof is on and windows are in, a further $137,500 is released. The fixing stage, covering internal fit-out, triggers $110,000, and the final $110,000 is paid at practical completion. Throughout this period, the borrower pays interest only on the cumulative drawn amount, which starts at $82,500 and builds to the full $550,000 over roughly six to nine months.
How Lenders Verify Each Stage Before Releasing Funds
Before releasing each progress payment, the lender arranges a progress inspection to confirm that the work has been completed in line with the contract and council plans. Some lenders use in-house valuers, while others engage third-party inspectors. If the inspector identifies incomplete or substandard work, the payment may be withheld until the issue is resolved. This protects both the lender and the borrower, but it can also delay the schedule if there are disputes about whether a stage has been properly reached.
Most lenders charge a Progressive Drawing Fee or Progressive Payment Fee for each inspection and drawdown. This fee typically ranges from $300 to $500 per progress payment, and it's worth budgeting for these costs upfront. Some lenders cap the total number of inspections, so if your builder requests more frequent drawdowns than the lender's standard schedule, additional fees may apply.
Fixed Price Contracts and Cost Plus Arrangements
Most construction loan applications are assessed on the basis of a fixed price building contract, where the total construction cost is agreed upfront. Lenders prefer this structure because it provides certainty around the loan amount and reduces the risk of cost overruns. If you're working with a registered builder in Coburg who provides a fixed price contract, your construction loan application will generally move through approval more quickly.
Cost plus contracts, where the builder charges for materials and labour with an agreed margin, are less common in residential construction and can be more difficult to finance. Lenders often require a detailed breakdown of projected costs and may cap the loan amount at a conservative estimate to account for variability. Owner builder finance is another category that attracts additional scrutiny, as lenders typically require evidence of building experience and may limit the loan-to-value ratio or require more frequent inspections.
Land and Construction Packages in Coburg
If you're purchasing vacant land and building simultaneously, a land and construction package allows you to fund both elements under a single facility. The land component is typically drawn in full at settlement, while the construction portion follows the progressive drawdown structure. During the construction phase, you'll pay interest on the land loan and the drawn construction amount, which means your monthly repayments will increase as each stage is completed.
In Coburg, where suitable land close to Bell Street or the Upfield railway line can attract strong demand, securing finance that covers both the land purchase and the build gives you certainty before committing to the site. Some lenders require you to commence building within a set period from the disclosure date, often six to twelve months, so it's important to have council approval and development application sorted before settlement if you're working to a tight timeline.
How Interest Is Calculated During Construction
Because construction loans only charge interest on the amount drawn down, your repayments start low and increase as each stage is completed. Interest is calculated daily on the outstanding balance, and most borrowers make interest-only payments during the construction phase. Once the build reaches practical completion and you move in, the loan converts to a standard principal-and-interest home loan, or it continues on interest-only terms if that's what you've arranged with the lender.
The construction loan interest rate is often slightly higher than a standard variable or fixed rate home loan, reflecting the additional complexity and risk involved in funding a project over time. Some lenders offer the option to lock in a fixed rate for the construction phase or for the post-construction period, which can provide certainty if you're concerned about rate movements during the build.
What Happens If the Build Runs Over Budget or Behind Schedule
If your builder requests additional payments beyond the agreed contract price, the lender will not automatically advance further funds. You'll need to cover any cost overruns from your own resources unless you apply for a loan variation and the lender agrees to increase the facility. This is why fixed price contracts are strongly preferred, as they shift the risk of cost blowouts to the builder rather than the borrower.
If the build is delayed and the construction phase extends beyond the lender's expected timeline, you may be required to extend the interest-only period or convert to principal-and-interest repayments earlier than planned. Lenders typically allow for reasonable delays, but prolonged stoppages or disputes with the builder can complicate the arrangement. Keeping in regular contact with your mortgage broker and the lender during the build helps manage these situations before they escalate.
Renovation Finance and Home Improvement Loans
If you're planning a substantial renovation rather than a full build, some lenders offer renovation finance that operates on a similar progressive drawdown basis. The structure depends on the scope of work. Minor renovations are often funded as a lump sum added to your existing home loan, while larger projects involving structural changes, extensions, or multiple trades may require a formal construction facility with inspections and staged payments.
For Coburg homeowners looking to extend a period terrace or add a second storey to a weatherboard cottage, a home loan refinance that includes a construction component can provide the funds while consolidating your existing mortgage. The lender will assess the proposed works based on plans, quotes from licensed tradespeople, and the expected value of the property after completion.
Whether you're funding a knockdown-rebuild, a land and build loan, or a major renovation, construction funding requires careful coordination between your builder, your lender, and often your conveyancer or solicitor. Working with a mortgage broker who understands how construction loan applications are assessed and how progress payment schedules are managed can make the difference between a project that runs to plan and one that stalls at a critical stage.
Call one of our team or book an appointment at a time that works for you to discuss your building project and how construction finance can be structured to suit your circumstances.
Frequently Asked Questions
How are construction loan funds released during a build?
Construction loans release funds in instalments as your builder completes defined stages of the project. Lenders arrange a progress inspection at each stage to verify the work before releasing the next payment, and you only pay interest on the amount drawn down so far.
What is a typical construction loan progress payment schedule?
Most lenders work with four to six progress payments, including base stage, frame stage, lock-up stage, fixing stage, and practical completion. Each stage represents a portion of the total contract value, typically ranging from 10% to 25% per drawdown.
Can I get construction finance for a renovation in Coburg?
Substantial renovations involving structural work or multiple trades can be funded through renovation finance that operates on a progressive drawdown basis. Minor renovations are often funded as a lump sum added to your existing home loan.
What happens if my building project runs over budget?
If your builder requests additional payments beyond the agreed contract price, the lender will not automatically advance further funds. You'll need to cover cost overruns from your own resources or apply for a loan variation, which is why fixed price contracts are strongly preferred.
Do I pay interest on the full loan amount during construction?
No, you only pay interest on the amount drawn down at each stage, not the full loan amount. Most borrowers make interest-only payments during construction, which keeps servicing costs lower until the build is complete.
