Construction Loan Bank Requirements for Residential Builders in Australia

What it is

A construction loan is a special purpose home loan that funds a residential build in instalments rather than as one lump sum. The bank holds the approved amount and releases part of it after each completed stage of construction, called a progress payment or progress draw. The Australian government business portal describes a construction loan as a home loan that funds a build in stages as work is completed, rather than as one lump sum at settlement.

The borrower is usually the homeowner, not the builder. The builder is paid by the bank on the homeowner's behalf after the bank confirms the relevant stage is complete and the invoice is valid. This makes the builder a third party to the loan but a critical participant in the draw process. If the builder's paperwork is wrong the draw stops.

Standard progress draw stages

Most major lenders in Australia use five standard stages for a new build under a fixed price residential building contract. The exact split varies by lender and by state but the common pattern is base 15 to 20 per cent, frame 15 to 20 per cent, lock up 25 to 30 per cent, fixing 20 per cent and practical completion 10 to 15 per cent. Deposits are usually capped at 5 per cent under state home building legislation, so the first draw replaces money the homeowner has already paid.

NSW Fair Trading sets the deposit cap and the rules on progress payments in residential contracts. Other states have similar caps under their building works legislation. Progress payment claims for a typical home build can only be made once per month unless the contract specifies otherwise, and the amount must match the work carried out.

What banks require at each draw

The builder gives the homeowner an invoice for the stage. The homeowner signs an authority to pay and forwards the invoice to the bank. The bank then runs through a checklist before releasing funds.

The standard checklist includes a fixed price contract that matches the loan amount, evidence of home indemnity or domestic building insurance under state legislation, a council approval or complying development certificate, a current builders licence number and a tax invoice for the stage. For larger loans the bank will also order an inspection from a valuer who attends site, confirms the stage is complete and reports back.

If the valuer says the stage is not complete the draw is held until the builder finishes the outstanding work and the valuer returns. This is the most common cause of delayed payment to builders. The fix is to invoice only after the work is genuinely complete and to photograph the site at handover for the valuer's reference.

Insurance evidence

State home building insurance is mandatory for residential work over a set threshold: $20,000 in NSW (Home Building Compensation Fund), $16,000 in Victoria (Domestic Building Insurance) and around $3,300 in Queensland (Home Warranty Scheme). The certificate of insurance must be given to the homeowner before the deposit or any progress payment is taken under section 92 of the Home Building Act 1989 in NSW and equivalent provisions in other states.

Banks will not release the first construction draw without sighting the certificate. Builders should attach the certificate to the first invoice and to the contract pack the homeowner gives the bank at loan settlement.

Valuation method

Banks value the construction project on an "as if complete" basis using the fixed price contract and the plans. This valuation drives the loan to value ratio and the loan approval. If the contract value rises during construction through variations the bank may require a fresh valuation and may not fund the variation if it pushes the loan to value ratio past the approved limit.

Builders should keep variations in writing, signed by the homeowner, with a clear cost and a clear scope. Verbal variations rarely get funded. Banks treat undocumented variations as the builder's commercial risk.

When draws fall over

Three problems delay or stop construction draws: missing or expired insurance, incomplete work flagged by the valuer, and variations the homeowner did not approve in writing. A fourth less common problem is a builder licence suspension, which freezes payments under most lender policies until the licence is reinstated.

Builders running multiple jobs should track each draw against the bank's standard stages and forecast the cash flow gap between invoicing and payment. The typical gap is 7 to 14 business days from invoice to receipt of funds, longer if a valuer inspection is required. Cash flow planning at this resolution is what separates builders who survive a slow draw from builders who run out of money mid-build.