The short answer
Banks manage fixed price build contracts through staged payments, releasing funds as each construction milestone is completed.
Banks prefer a fixed-price building contract because it locks in the total cost before they lend. The loan is then paid out in stages (deposit, base, frame, lock-up and completion), and before each payment the lender usually has the work checked so funds are only released for building that actually exists.
What is a fixed-price build contract?
A fixed-price contract sets the total cost of the build up front, with a clear list of inclusions. Lenders like it because the number they are lending against is known. A cost-plus contract, where the final price depends on what the builder spends, is much harder to finance and many lenders will not accept it for a standard home loan.
Before approving a construction loan, the bank will usually want:
The signed fixed-price building contract
Council-approved plans and specifications
The builder’s insurance (domestic building insurance in Victoria)
A list of any variations or extras outside the contract
How are the funds released?
Construction loans are paid out in progress payments that follow the stages in your contract:
Deposit – usually paid from your own funds when you sign
Base stage – slab or footings complete
Frame stage – the frame is up
Lock-up – external walls, windows and doors in
Fixing – internal linings, cabinetry and fit-off
Completion – the home is finished and handed over
At each stage the builder sends an invoice. You approve it and forward it to the lender, the lender arranges a valuation or inspection to confirm the stage is complete, and then the funds are paid to the builder.
Why does the bank check each stage?
Until the house is finished, the lender’s security is part land and part building site. The inspection protects you and the bank: money only goes out for work that has actually been done. It also keeps the loan in line with the value of what has been built.
How do repayments work during the build?
Most construction loans are interest-only during the build, and you only pay interest on the amount drawn so far. Early on that is small. It grows as each stage is paid. Once the home is complete the loan usually switches to principal and interest.
If you are renting while you build, budget for rent plus rising interest repayments at the same time.
A typical Melbourne scenario
Sam and Lina have settled on a block in Clyde North and signed a $420,000 fixed-price contract with a volume builder. Their land loan is already in place. They pay the 5% deposit from savings. When the slab is poured, the builder issues a base-stage invoice of about $63,000. The lender inspects the site, confirms the slab is down and pays the builder. Their interest is only charged on the land loan plus that $63,000, not the full build cost. The same process repeats at frame, lock-up, fixing and completion.
What can go wrong?
Variations: extras added after approval are usually paid from your own savings unless the loan is varied.
Cost increases: a genuine fixed-price contract protects you, but check for clauses that allow price rises.
Delays: longer builds mean more months of paying rent and interest together.
Key takeaways
Lenders want a fixed-price contract so the total cost is known.
Funds are released in stages, each checked before payment.
You pay interest only on what has been drawn during the build.
Keep a savings buffer for variations and delays.
Read how construction loan progress payments work and off-the-plan versus building, explore our construction loans and house and land package loans, or talk to our mortgage brokers.
General information only. This article does not take into account your objectives, financial situation or needs, so consider whether it is appropriate for you and seek personal advice before acting. Elephant Financial Pty Ltd trading as Elephant Advisory is an authorised credit representative (ACR 487962) of Yellow Brick Road Aggregation Pty Ltd (formerly Vow Financial Pty Ltd) (ABN 66 138 789 161), Australian Credit Licence 390261.
Gav is the person you want in your corner when it comes to property finance. After years in banking and motor trade finance, he joined Elephant early and never looked back. He's passionate about combining property and finance to help clients achieve their goals through tailored financial structuring, and he's very serious about snacks at meetings.
