The short answer
Learn how construction loans are funded through progress payments - from base to completion - and how builders and banks manage each stage.
Progress payments are how a construction loan is paid out. Once you have settled on the land, the lender releases money to your builder in stages (base, frame, lock-up, fixing and completion) as each one is finished. You only pay interest on what has been drawn so far, so repayments start small and grow during the build.
How does a construction loan work after land settlement?
A house and land build usually has two parts: the land loan, which settles like a normal purchase, and the construction loan, which is drawn down over time. After the land settles and the build starts, the construction side moves into progress payments.
Instead of paying the builder the whole contract price up front, the lender pays it in instalments that match the stages in your building contract. A stage might take anywhere from a few weeks to a couple of months, depending on the builder and the weather.
What are the typical build stages?
Deposit: usually 5% of the contract price, often paid from your savings
Base: slab or footings complete
Frame: frame and roof trusses up
Lock-up: external walls, windows and doors installed
Fixing: internal plaster, cabinetry and fit-off
Completion: practical completion and handover
Percentages vary between contracts, so check your own schedule.
What happens at each stage?
The builder finishes a stage and sends you an invoice.
You check the work and sign the progress payment authority.
You send the invoice and authority to your lender (or your broker does it for you).
The lender arranges an inspection or valuation to confirm the stage is complete.
The lender pays the builder directly.
A good broker will keep an eye on each request so payments are not held up and your builder is not left waiting.
How do repayments change during the build?
During construction most loans are interest-only on the amount drawn. Early on you might only be paying interest on the land plus the base stage. By lock-up the balance is much larger, so your repayments rise. At completion the loan usually switches to principal and interest.
Plan your cash flow around this, especially if you are paying rent while you build.
A typical Melbourne scenario
Tom and Ana settle on a $380,000 block in Officer and sign a $400,000 fixed-price build. Their deposit is paid from savings. Two months later the slab is down and the base-stage invoice of $60,000 arrives. The lender inspects, confirms the stage and pays the builder. Their monthly interest now covers the land loan plus $60,000. Over the next eight months the frame, lock-up, fixing and completion payments follow, and their repayments rise with each one until the home is handed over and the full loan is in place.
Tips to keep the build on track
Keep a savings buffer for variations and extras outside the contract.
Read each invoice before you sign it, and inspect the work or use an independent inspector.
Tell your broker early if the build is delayed, as some approvals have time limits.
Budget for rising repayments and rent at the same time.
Key takeaways
Progress payments release your construction loan in stages.
Each stage is checked before the builder is paid.
Interest is only charged on what has been drawn.
Repayments rise through the build, so plan your cash flow.
Learn how banks manage fixed-price build contracts, compare off the plan and building, and see our construction loans and house and land package loans. Use the loan repayment calculator to plan ahead.
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.
