Building a home or taking on a major renovation is exciting, and thankfully, funding your big property dreams can be relatively easy. Construction loans are unique, and come with some of their own terms and processes – so let’s break it down so you can fund your project with confidence.
How does a construction loan work?
A construction home loan is designed specifically to fund major construction work, often used to build a new property or undertake structural renovations.
What’s unique about construction loans is your lender works directly with your licenced builder to pay them in stages. This is an important distinction, as you’ll only pay interest on the amount paid to your builder to-date, instead of the whole loan balance on settlement.
Repayments start small and grow as the build progresses and your builder is gradually paid for the work completed. Once the build is finished, your construction loan will convert to a standard home loan.
The staged approach is the main thing that sets it apart from a regular home loan, where the full amount is handed over at settlement. A construction loan could fund a new build (including a duplex), a knock-down rebuild, or be used to fund major structural renovations on a home you already own. It’s designed for single dwellings (including duplexes), not multi-unit or terraced developments split across different titles.
You’ll also be able to make interest-only payments during your construction period, helping to keep your cash flow healthy.
How progress payments work
Your loan is paid out in stages (called progress payments) which are tied to key stages of your build. As each stage is finished, your builder invoices for the work, and your lender will pay them directly.
Here’s an example of how payments are made, based off the building stage.
Percentages vary by builder and the building contract, so treat these as a guide rather than fixed figures:
Deposit: 5%
Base/slab: 15-20%
Frame: 20%
Lock-up: 20%
Fixing/fit-out: 25-30%
Practical completion: 10%
Because funds are released bit by bit, your loan balance, and your interest, rise gradually as the build moves along. You won’t pay interest on the full approved amount until the build is complete, which is why early repayments can be small and grow over time.
How a progress payment gets released
Once your builder has completed each stage of the build, your lender will undertake a progress inspection before any money is paid out. This helps protect you as it ensures the build is completed to an adequate standard and you’re not paying for work that hasn’t been completed yet.
Here’s how we manage each progress payment:
1. Your builder sends you an invoice.
2. You send that invoice and a completed Progress Payment Request Form to your lender.
3. If an inspection is needed, an onsite valuation is arranged to confirm the build matches the schedule, which typically happens within about 48 hours of the request.
4. Once the inspection confirms the progress, funds are paid directly to your builder.
For exactly what’s involved in a progress inspection, our guide to progress inspections and valuation types goes deeper.
What can slow down progress payments?
Most delays come down to paperwork or timing rather than anything serious. The usual culprits are incomplete or unclear invoices, variations to the plan, or weather pushing out a stage. Issues raised at the inspection itself, like a defect that needs a re-inspection, can also delay payments.
You can keep things moving by having the essentials ready: your building contract, all invoices, any variation of paperwork, and your insurance certificate. If something is holding a payment up, contact your lender directly. Sorting it sooner keeps your builder paid and construction on-track.
From the final payment to practical completion
When the last stage is paid and the build is signed off, your loan is about to change gear. The milestone that matters here is practical completion.
Practical completion means the home is finished (in-line with your building contract) and ready for handover! This is both a building and finance milestone, as there are just a few steps left before your construction loan converts to a regular home loan.
All you need to convert your construction loan to a home loan is:
- Occupancy (or completion) certificate: confirms the home is approved to live in
- Final inspection: a last check that the work is complete
- Final invoice from your builder
- Insurance updates: your final progress payment will need your Certificate of Occupancy and a building insurance policy in place
What happens when the build finishes
It’s time for a housewarming!
Financially, however, the main thing that changes is how you repay your loan.
During construction you’re on interest-only (IO) repayments. When the build finishes, you’ve got a choice: you can keep interest-only repayments for the rest of your elected IO period, including after you’ve moved in, or switch to principal and interest (P&I) repayments.
There are a few things to note as your loan converts:
- Your minimum repayment, repayment schedule and direct debit will change.
- You’ll need to take out building insurance.
- Your loan documents will reflect the new arrangement.
- Your interest rate will revert to a Residential Home Loan rate.
Tip: How to keep drawdowns on track
A bit of preparation goes a long way. Before each claim, have your documents ready: signed builder invoices, current insurance, and your stamped plans. Make sure every progress claim lines up with a stage that’s genuinely complete, and if the inspector asks for a rectification, sort it quickly. Keeping your lender or broker in the loop helps too.
With a Bluestone Construction Home Loan, a dedicated progress payments team coordinates each stage, so it’s the same people that manage your build through each stage.
If you want to know how each drawdown will be checked before you commit, a mortgage broker can walk you through what to expect. And if you’re still working out how to fund the land and the build in the first place, our guide to land and construction loans covers the two common structures.
Where to from here
A construction loan might look a little complex from the outside, but it follows a clear rhythm: build, inspect, release the funds, and repeat. At the end of the build, your loan then rolls over to a standard home loan. At the end of the day, if you keep your paperwork handy and stay in touch with your progress payments team, most of it takes care of itself.
Got a build underway and want a hand with progress payments? Bluestone’s construction loan team is on progresspayments@bluestone.com.au or 13 25 83.
The information provided in this article is general in nature and has been prepared without considering your requirements, objectives or financial situation. Bluestone Home Loans are administered by Bluestone Servicing Pty Ltd ACN 122 698 328, Australian Credit Licence 390183 on behalf of the Credit Provider, Permanent Custodians Ltd ACN 001 426 384. All loans are subject to suitability and credit assessment. Fees, terms, conditions, and lending criteria apply.
