Construction loan progress payments explained

What are construction loan progress payments?

When you buy an existing house, the loan is paid out in full at settlement. A build does not work that way, because there is nothing finished to hold as security on day one. A construction loan therefore releases money in stages, called progress payments or drawdowns, as the builder completes agreed parts of the work.

Each time a stage is finished, the builder sends a claim. The lender checks it, often with some evidence the work is done, and pays the builder directly or releases funds to you to pay. Then the next stage begins. This staging protects the lender, which only lends against what has actually been built, and it protects you from paying for work that has not happened.

Ownright Custom Finance arranges construction finance Australia-wide, including for borrowers with complicated incomes. This guide explains how the payments usually run and how to keep them smooth.

What are the typical stages of a build?

Stage names vary by contract, builder and state. Consumer Affairs Victoria describes domestic building payments as tied to four stages: base, frame, lock-up and fixing, followed by completion. Typical meanings are:

Stage	What it usually covers
Deposit	A limited upfront amount to start, where allowed
Base	Site preparation and the slab or footings
Frame	Structural frame and roof structure
Lock-up	Walls, roof, windows and external doors fitted so the building can be secured
Fixing	Internal linings, cabinetry and fittings
Completion	Final finishes, clean-up and handover

Not every contract uses these exact stages. NSW Fair Trading explains that for contracts over $20,000, fixed payments can be tied to completed stages, with each stage described in plain language and each payment a set amount or percentage of the contract price. Contracts can also use cost-based payments, supported by invoices, or a mix of both.

How do lenders release the money?

The details differ between lenders, but a common pattern is:

1. Approval and contract. The lender reviews your building contract, plans and builder details before approving the loan.
2. Initial drawdown. After settlement of the land, where relevant, and any deposit, the first payment is released.
3. Progress claim. The builder finishes a stage and sends an invoice or claim.
4. Check. The lender may arrange an inspection or valuation, ask for photos, certificates or a sign-off from you, or rely on documents. Practices vary.
5. Payment. Funds go to the builder, often by direct payment from the lender.
6. Repeat. The cycle continues until completion, then the loan typically converts to a standard home loan.

Timing depends on the lender’s process and how quickly paperwork arrives, so allow for it in your schedule. Ask your broker how long your lender usually takes between claim and payment.

How does interest work during the build?

With many construction loans, interest is charged on the amount drawn at each point, not on the full approved limit. Repayments therefore start low and rise as more of the loan is used. Some lenders allow interest-only repayments during construction.

The exact method differs between lenders. Before signing, ask for a clear worked schedule showing roughly how repayments could change at each stage, and check how interest is calculated. We do not publish rates or fee amounts, because every loan is priced on the borrower’s circumstances.

What protections exist around deposits and payments?

Rules differ by state, so check your jurisdiction. As examples:

• Victoria. Consumer Affairs Victoria says the maximum deposit for domestic building contracts is 5 percent for contracts of $20,000 or more, and that you pay for completed stages by law. It advises against paying in advance and notes that home warranty insurance may not cover work you pay for before it is finished.
• New South Wales. NSW Fair Trading says the maximum deposit is 10 percent of the contract price, and that payments should reflect work actually completed, not time spent. If home building compensation cover is required, the contractor cannot request a deposit or other payment until it is in place. It also notes your bank may have its own rules for progress payments.

Both regulators mention that an independent building consultant or inspector can check completed work before you pay. This is general information, not legal advice. Anything unusual in your contract is worth taking to a solicitor.

Who does this guide suit?

• People building a new home on land they own or are buying.
• Owner-builders and people managing a renovation or extension. See our renovation loans page.
• Buyers combining land and a build. The land and construction loans page explains the pairing.
• Self-employed borrowers whose income complicates a construction approval.
• Investors building to rent or sell.

For the broader product, see the construction loans page.

What do lenders look at for a construction loan?

Construction lending involves more moving parts than a standard purchase, so lenders usually examine:

• Your income and deposit. The standard inquiry, verification and assessment under ASIC’s responsible lending rules.
• The builder. Licence, track record and financial standing.
• The contract. Fixed price versus cost-plus, stage schedule and inclusions.
• Plans, permits and approvals. Council or certifier sign-off.
• The land. Ownership, title and any special conditions.
• Valuation on completion. The lender usually wants confidence about the finished value.
• Contingency. Some want a buffer for cost overruns.

If you are self-employed, our guide on getting a home loan when self-employed explains how income is assessed.

What does a worked example look like?

This is an illustrative scenario only and does not describe a real client.

A couple owns a block of land and signs a fixed-price contract with a licensed builder. Their contract sets out a deposit, then payments at base, frame, lock-up, fixing and completion. Their lender approves a construction loan and pays the builder after each claim, with an inspection at major stages.

At lock-up, the builder’s claim is lodged on a Friday. The lender asks for a certificate and an inspection, which takes several days, so the payment lands the following week. Because the couple’s broker explained this timing early, they had a small buffer set aside and the builder was not left waiting. Nothing dramatic happened, which is the aim. Timing and documents differ for every build.

How does Ownright approach construction finance?

We start with the plan: land, builder, contract and your income. Trevor Scott and the team then look for lenders whose construction policies suit your situation, including those that handle self-employed borrowers, unusual blocks or more complicated builds.

We also help you think through the practicalities: how much of a buffer to hold, how to time claims and what your lender will want at each stage. We work Australia-wide from our head office in Knoxfield, Victoria. If you are planning a build, send us your details on the apply page.

What happens at the end of the build?

When the work is complete and the final payment has been made, the construction loan generally converts into a standard home loan. That is the point at which many borrowers move to principal and interest repayments, and the lender may revalue the property to confirm the finished security.

Before that happens, lenders and councils usually require final certificates, such as an occupancy certificate or its state equivalent, and your builder will arrange a final inspection. It is worth checking your contract and your loan documents for what is needed to trigger the last payment, and whether any retention or defect period applies. Ask your builder and read your contract for any defect or maintenance period, since the specifics depend on your contract and state.

Plan for the moment the loan converts, too. Your repayments may change, and you may want to review the structure of the loan, including offset features and term. A broker can talk you through the conversion before it arrives.

What if the build costs more than planned?

Cost overruns are one of the biggest worries in any build. Variations, price rises on materials, weather delays and site surprises can all push the total above the contract price, particularly on cost-based contracts.

Some lenders ask borrowers to hold a contingency buffer from the start. Others will consider an increase to the loan if the extra cost is documented and the finished value supports it, though approval is never automatic. If you suspect a shortfall is coming, raise it early with your broker and builder, because options narrow the later you leave it.

It also helps to keep every variation in writing, with the price confirmed before the work happens. NSW Fair Trading notes that payments should reflect work actually completed and that claims on cost-based payments must be backed by invoices, receipts or other documents. Good paperwork protects you and keeps lender checks smooth.

Who coordinates the stage claims?

In most builds the builder lodges the claim, the lender assesses it and you may be asked to confirm the work. Some borrowers appoint their broker, a building consultant or a trusted family member to track the paperwork so nothing falls through the cracks. Keep a simple log of each stage, the date it was claimed, what the lender asked for and the date funds were released. If a claim is queried, you will have the answers at your fingertips, and your next payment will not be held up by a week of email tag.

Owner-builders face extra scrutiny, because there is no licensed builder standing behind the schedule. Many lenders want to see more evidence of experience, a detailed budget and sometimes a lower borrowing limit. If you plan to manage the build yourself, say so at the very start so your broker can look at lenders who are comfortable with it, and ask what additional paperwork will be required at each drawdown.

What mistakes slow progress payments down?

• Missing paperwork. Incomplete claims or certificates delay the next release.
• Paying ahead. Both regulators advise against paying in advance of the work.
• No buffer for timing gaps. Payments take time to process.
• Unapproved variations. Changes to scope or price can complicate valuations and approvals.
• Not telling the lender about delays. Surprises make the lender cautious.
• Skipping independent checks at key stages. An inspection can catch issues before payment.

How do I prepare before applying?

• Collect your income evidence and deposit proof.
• Get your building contract, plans, permits and builder details in order.
• Understand the payment schedule and how it lines up with your loan.
• Plan a contingency buffer for costs and timing.
• Decide who will manage inspections and sign-offs.
• Talk to a broker about how interest will behave during the build.

Our new home loans page covers the move from build to completion. If you are building something commercial, the commercial construction loans page is the better fit.

What should I do next?

If you are planning to build, talk to a broker before signing the building contract if you can. It is far easier to fit a contract to a loan than to fit a loan to a contract that is already signed. Call Ownright Custom Finance on 03 7043 7233 or start your enquiry here, and we will walk through the stages with you.