Construction Loans and Progress Drawdowns in Australia

What it is

A construction loan is a home loan structured so the lender releases money in tranches as the build hits agreed stages. Each tranche is called a drawdown. The borrower (the owner) carries the loan. The builder works for the owner. But the builder's cash flow lives or dies on how cleanly the drawdowns line up with the progress claims.

For an Australian builder, knowing how a construction loan works is not optional. If the lender is slow on a drawdown, the builder waits. If the lender refuses a stage because the inspection failed, the builder has done the work for free until it is fixed.

How a progress drawdown loan works

The lender approves the total loan amount upfront based on the contract sum and the as-if-complete valuation of the home. The funds do not release in one block. They release as the build progresses through pre-agreed stages.

The typical residential stage schedule

Five stages is the common pattern in Australia, though contracts and lenders vary.

Slab or base stage. Usually around 15 to 20 per cent of the contract sum. Released after the slab is poured and signed off.

Frame stage. Around 20 per cent. Released after the frame is up, braced and inspected by the building surveyor.

Lockup stage. Around 25 per cent. Released after the roof, external doors and windows are in.

Fixing stage. Around 20 per cent. Released after internal fixings (cabinetry, tiling, plasterboard) are complete.

Practical Completion. The remaining 15 to 20 per cent, less retention. Released after PC is reached and the Occupation Certificate is issued.

The percentages in your contract control. Lenders fund against the contract schedule, not a textbook split.

Deposit handling

Lenders fund construction loans on top of the borrower's deposit. The borrower's equity usually goes in first. The lender then drips in their share through the drawdowns. By PC the loan is fully drawn.

Interest during construction

Most construction loans charge interest only on the amount actually drawn. The borrower pays interest each month on whatever has been released to that point. At PC, the loan rolls to principal and interest at the contracted rate.

What lenders need at each drawdown

A drawdown does not happen automatically. The borrower has to lodge a drawdown request and the lender has to be satisfied that the stage is reached.

The drawdown request pack

A typical lender pack at each stage includes the builder's progress claim invoice, a copy of the variation schedule if any, photographs of the completed stage and a stage inspection report.

Lender valuation or inspection

Lenders use one of two methods to verify a stage.

Some lenders send a panel valuer to the site for each drawdown after the slab stage. The valuer signs off on completion of the stage.

Other lenders accept a builder declaration plus photos with a desktop check. This is faster but lenders may still order a valuation if anything looks off.

The first stage (slab) almost always requires a physical inspection. Some lenders also require the building surveyor or private inspector to lodge mandatory inspections with council before they release funds.

Insurance and warranty checks

Before the first drawdown, the lender will want to see the home warranty insurance under the relevant state scheme (HBCF in NSW, the VMIA Domestic Building Insurance scheme in Victoria, the Queensland Home Warranty Scheme run by QBCC) and the contractor all risks insurance. Missing paperwork stops the drawdown cold.

Where builders lose cash flow

The lag between submitting a claim and receiving cleared funds is where many residential builders bleed.

Inspection delay

Lender valuers run a roster. Sometimes a stage inspection is 7 to 10 working days out. The builder has paid trades for the stage but cannot draw against the next stage until the previous one clears.

Variation overruns

Variations that exceed the originally approved contract sum may not be funded by the lender at all. The owner has to bring extra cash. If they cannot, the builder is exposed.

Defects flagged at inspection

A valuer who finds the slab cracked or the frame out of plumb will not sign off. The drawdown waits until the defect is fixed and the valuer revisits.

Bank processing time

Even after a successful inspection, lenders typically take 1 to 3 business days to release. Friday claims often do not clear until Tuesday.

Tax treatment of interest

For an owner who is building a home to live in, the construction loan interest is not deductible. It is private interest on a personal residence.

For an owner who is building to rent or to sell as a developer, the ATO position is that interest on a loan used to construct an income-producing rental property is deductible from when the loan is drawn, provided the property is genuinely intended for rental. The ATO is firm that intent matters. If the property is later occupied as a main residence, the deduction stops from that point.

The vacant land rule is the trap. If the loan covers both land purchase and construction, the interest attributable to the vacant land period is generally not deductible until the home is substantially constructed and ready for rent. The builder is not the taxpayer here, but knowing the framework helps when an owner asks about the timing of their settlement.

How to keep drawdowns clean

Three habits make construction lending work for the builder.

Pre-confirm the stage schedule with the lender

Before site start, get the lender to sign off on the contract's stage schedule and percentages. Mismatches between the contract and the lender's stage template are the most common cause of drawdown holds.

Photo and document every stage

A stage photo set, dated and stored, gives the valuer everything they need on the first visit. Less back and forth.

Diary the lender lead times

Submit the drawdown request the day the stage is reached. Build the lender lag into the cash flow forecast.

Watch the variation budget

Variations beyond the lender's funded amount need a written acknowledgement from the owner that they will fund the gap from their own cash. Get it before the work starts.