Construction Loan Features Not to Overlook

A construction loan releases funds in stages as your build progresses, and you only pay interest on what's been drawn down so far.

That structure changes how you budget, how your builder gets paid, and how much cash you need to keep on hand while the project is underway. If you're planning a knockdown rebuild in Double Bay or a renovation that requires council approval, understanding these features before you sign anything will save you from surprises mid-project.

Progressive Drawdowns Mean You're Not Borrowing the Full Amount Upfront

With a construction loan, the lender releases funds according to a progress payment schedule that matches each stage of the build. Your builder submits an invoice at each milestone, the lender arranges a progress inspection, and once that stage is approved, the funds go out. You're only charged interest on the amount that's been drawn down, not the total loan amount. Between drawdowns, your repayments stay lower because the outstanding balance is still building up.

Consider a renovation in Double Bay where the total project cost is $800,000. After the first stage, only $120,000 has been drawn. Your interest is calculated on that $120,000, not the full amount. As each stage completes and more funds are released, your repayments increase in line with the growing balance. By the time the build finishes and the full amount is drawn, you transition to standard principal and interest repayments or continue with interest-only if that's what your loan allows.

Most lenders charge a progressive drawing fee each time funds are released, typically between $200 and $400 per drawdown. If your build involves six stages, that's an extra cost to factor into your budget. Some lenders bundle this into a single upfront fee instead.

Fixed Price Contracts Give You More Certainty and Make Lender Approval Faster

A fixed price building contract locks in the total cost before construction starts, and most lenders prefer this arrangement because it reduces the risk of cost blowouts. The contract spells out what's included, what the builder is responsible for, and what the progress payment schedule looks like. This makes the loan application process more straightforward because the lender can assess exactly how much you need and when.

Cost plus contracts, where you pay the builder's costs plus a margin, are harder to get approved and usually require a larger deposit or additional security. Lenders see them as higher risk because the final cost isn't locked in. If you're using a registered builder for a custom home in Double Bay, a fixed price contract also gives you clearer recourse if timelines blow out or the scope changes.

Your builder should provide a detailed progress payment schedule that aligns with the construction draw schedule your lender requires. Common stages include base stage, frame stage, lockup, fixing, and completion. The percentages vary, but they typically follow a structure where the builder receives around 10% to 15% at the base stage, 15% to 20% at frame, and so on. If your builder's payment schedule doesn't align with what the lender will release, you'll need to cover the gap yourself or renegotiate the terms before you start.

Interest-Only Repayments During Construction Keep Your Cash Flow Manageable

Most construction loans offer interest-only repayment options while the build is underway. You're only paying interest on the drawn-down amount, and you're not required to pay down the principal until construction finishes and the loan converts to a standard home loan. This keeps your repayments lower during a period when you're often managing other project costs or still paying rent or a mortgage elsewhere.

Once the build is complete, the loan typically converts to a construction to permanent loan, meaning it rolls into a standard variable or fixed rate home loan without needing to reapply. At that point, you start making principal and interest repayments on the full amount. Some lenders allow you to continue with interest-only repayments for a set period after completion, but that depends on your circumstances and the lender's policy.

If you're planning to sell your existing home in Bellevue Hill or Vaucluse and move into the new build, the interest-only period gives you breathing room while you're carrying two properties. If you're building an investment property, interest-only repayments may continue for several years depending on your loan structure. Either way, the feature is there to manage cash flow, not to avoid repaying the loan altogether.

You'll Need to Start Building Within a Set Period After Settlement

Most construction loans require you to commence building within a set period from the disclosure date, usually between three and six months. If you don't, the lender may withdraw the approval or require you to reapply. This matters if you're waiting on a development application or council approval, or if your builder's schedule has been pushed back.

In Double Bay, where heritage overlays and council requirements can extend approval timelines, you need to know whether your loan approval will still be valid by the time you're ready to start. If there's a delay, speak to your lender early. Some will extend the commencement period if you can show that the delay is due to council processes rather than a change in your circumstances.

The same applies to land and construction packages or house and land packages where settlement on the land happens before construction starts. The clock starts ticking from the date you take ownership of the land, not from the date your builder is ready to go. If you're buying suitable land and planning a custom design, factor in the time it takes to finalise plans, get council approval, and lock in your builder before you commit to settlement.

Progress Inspections and Drawdown Timing Depend on the Lender's Process

Each time your builder requests a drawdown, the lender arranges a progress inspection to confirm the stage is complete. This usually involves a third-party inspector or valuer visiting the site and submitting a report. Once the lender receives that report and approves the drawdown, funds are released to the builder. The process typically takes a few days to a week, depending on the lender.

If the inspection finds that the work doesn't match what was invoiced, the lender may hold back part of the drawdown until the issue is resolved. This can create tension between you and your builder, especially if they've already paid sub-contractors or ordered materials for the next stage. Clear communication between you, your builder, and your broker helps avoid these hold-ups.

Some lenders allow you to make additional payments during construction if you want to reduce the balance or pay down interest in advance. Others don't. If you're expecting a bonus or sale proceeds from another property and want to reduce your interest costs during the build, check whether your loan allows extra repayments without penalty.

Owner Builder Finance Is Harder to Access and Comes With Stricter Conditions

If you're planning to act as an owner builder, most lenders will either decline the application or require a much larger deposit. Owner builder finance is seen as higher risk because there's no registered builder overseeing the project, and the lender has less recourse if something goes wrong. You'll usually need at least 20% to 30% equity, and even then, your options are limited to a handful of specialist lenders.

You'll also need to manage the progress payment schedule yourself, coordinate sub-contractors, and ensure that each stage meets the lender's requirements for drawdown approval. If you're building a custom home in Double Bay and want to manage trades yourself to save on builder's margins, weigh that saving against the difficulty of securing finance and the time involved in project management.

For most people building in this area, working with a registered builder under a fixed price building contract gives you access to far more home loan options and keeps the process on track.

If you're planning a build, renovation, or land and build loan, call one of our team or book an appointment at a time that works for you. We'll walk through the progress payment schedule, the drawdown process, and which lenders will actually fund the type of project you're planning.

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