How Construction Loans and Progress Draws Work in Australia

What it is

A construction loan is a home loan that funds a build in stages instead of paying out a single lump sum at settlement. The lender holds the approved facility and releases progress payments to the builder after each stage is reached and verified. The borrower (the homeowner) only pays interest on the drawn balance during the build, which keeps holding costs low while the house is going up.

For the builder, this matters because the bank, not the homeowner, controls the timing of every payment after the deposit. Misread the bank rules and you can finish a stage, invoice, and wait a fortnight while the lender orders a valuer inspection. That gap eats your cashflow if the next stage is already underway.

Construction loan versus standard mortgage

A standard residential mortgage settles once. Funds discharge the previous loan or pay the vendor, and the borrower starts repaying principal and interest from day one. The asset already exists, so the bank values it at settlement and is done.

A construction loan is approved against the future value of the completed dwelling, supported by a fixed price building contract and council approved plans. The lender values the land plus the contracted build cost, sets a loan-to-value ratio against the as-if-complete value, and then releases funds against site progress rather than against a single sale.

Key differences for the builder:

• Money is paid in tranches matched to the building contract progress payment schedule
• Each tranche needs evidence the stage is complete
• Repayments are usually interest only during construction, switching to principal and interest at practical completion
• Most lenders cap the construction period to 12 to 18 months
• The contract must be a fixed price, fixed term, lump sum form acceptable to the lender

The standard progress payment stages

Australian construction loans typically follow a five or six stage drawdown schedule based on the building contract. A common split is:

• Deposit at signing (around 5 percent)
• Base or slab stage (around 15 percent)
• Frame stage (around 20 percent)
• Lockup or enclosed stage (around 20 percent)
• Fixing or fit-out stage (around 30 percent)
• Practical completion (around 10 percent)

Percentages vary by lender and by state. The Domestic Building Contracts Act 1995 (Vic) and equivalent state acts cap how much deposit a builder can take and constrain the progress payment structure for residential work. Always read the contract clause against the relevant state act before invoicing.

The progress draw process

Stage complete

The builder reaches a contract stage on site. For slab stage that means a poured, cured slab with engineer sign off. For frame, a complete structural frame that has passed any required frame inspection. For lockup, external walls, roof, windows and external doors fitted so the building is weather-tight.

Invoice issued

The builder issues a progress claim invoice on the building contract template. The invoice references the stage, the contract sum, the percentage claimed and any approved variations. The homeowner countersigns to authorise drawdown.

Lender inspection

The lender orders a valuer or quantity surveyor to attend site and verify the stage is complete. Some lenders accept a builder statutory declaration plus photos for early stages and reserve full inspections for lockup and completion. Inspection turnaround is commonly three to five business days.

Funds released

Once the valuer signs off, the lender releases funds either to the borrower's offset account or directly to the builder. Most builders ask for direct payment to reduce the chance of homeowner delay. Direct payment authorities are signed at finance approval.

Where builders get caught

The two recurring problems are stage definition and variations. If the bank inspection report says lockup is not reached because the garage door is not yet fitted, the payment does not release even if the contract definition of lockup excludes the garage door. Tight contract definitions that match the bank stage description protect the builder.

Variations are the second trap. Most lenders require variation approval before work proceeds and require evidence the homeowner has funded the variation in cash before the bank will fund the original contract balance. A signed variation backed by a cleared deposit avoids a project pause at the next progress claim.

Practical completion and handover

At practical completion the final progress payment, often around 10 percent, is released after a final lender inspection. The loan converts from interest only to principal and interest, and the bank registers a first mortgage if it had not done so already. The builder receives final payment, the certifier issues an occupation certificate or equivalent and the warranty period under state residential building legislation begins.