Construction Loan Progress Payments: The Five Stages, Who Pays What and When
Key Takeaways Signing a fixed-price building contract, or standing mid-build in front of a builder’s invoice, is usually when the penny drops. A construction loan does not behave like a normal home loan. The money does not land in your account on settlement day. The lender releases it in slices, called progress payments, as your home physically takes shape. Knowing when each slice is released, who it is paid to, and what you fund yourself is the difference between a smooth build and a mid-project scramble for cash. That is also where a construction loan broker earns their place, matching the drawdown structure to a lender that handles it cleanly. How Progress Payments Actually Work A construction loan is approved for the full amount up front, but the funds sit undrawn until the builder earns them. The lender assesses your loan against the on-completion value of the property, what the finished home is expected to be worth, and sets your Loan to Value Ratio (LVR) against that figure. The sequence is fairly consistent across lenders. The builder finishes a stage and issues a progress claim, an invoice, for the percentage of the contract price set out in your fixed-price building contract. You sign a drawdown request authorising the lender to pay it. The lender may then send a valuer or inspector to confirm the claimed work is done, with some lenders inspecting every stage and others only at key milestones such as frame and completion. Once satisfied, the lender pays the funds directly to the builder, not to you. This protects both sides. The builder is paid promptly for finished work, and you are not paying for work that has not been done. Because the loan is drawn progressively, interest is charged only on the balance drawn to date, and repayments during construction are typically interest-only. Repayments start small after the first drawdown, step up after each stage, and most loans convert to principal-and-interest once the final payment is made. The Five Standard Construction Stages Most fixed-price building contracts in Australia break the build into five progress payment stages, with a small deposit paid before work begins. The percentages below are typical ranges only. Your contract sets the actual figures, and NSW legislation caps both the deposit and progress claims. The stages are: Slab or Base Typically around 10% to 20%. This covers site preparation, footings and pouring the concrete slab, or stumps and bearers for a non-slab home. It is the first drawdown from your loan, though much of the early spend may already have come from your own funds. Frame Typically around 15% to 20%. The skeleton goes up, with wall frames, roof trusses and structural steel. Many lenders treat the frame as a key inspection point, because errors here are expensive to fix later. Lock-Up Typically around 20% to 35%. External walls, roofing, windows and external doors are installed, so the building can be locked. This is usually the largest single progress payment, and the stage where your loan balance and interest bill jump most noticeably. Fixing or Fit-Out Typically around 20% to 30%. Internal fit-out covers plastering, cabinetry, benchtops, doors, skirting, tiling and the bulk of the plumbing and electrical work. By the end of fixing, the home looks close to finished. Completion Typically around 10% to 15%. Painting, floor coverings, appliance installation, final connections and the clean-up. The completion payment is deliberately held back until the lender is satisfied the home is genuinely finished. Percentages are indicative only and vary by contract and lender, so use them as a general guide. Watching the Interest Build Numbers make this easier to see. Say you own your land outright and sign a fixed-price building contract for $500,000, with a construction loan of $475,000 approved after a 5% builder’s deposit of $25,000 is paid from savings. The Home Building Act 1989 (NSW) allows a deposit of up to 10%, so many builders ask for 5% to 10%. For illustration only, assume interest of around 6% a year, charged interest-only during the build. Two things stand out. You never pay full interest on day one, a real saving against drawing the whole loan up front. And repayments climb steadily, so stress-test your budget against the lock-up-onwards repayments, not the slab-stage ones, especially if you are paying rent while you build. What You Pay Before the Loan Starts Drawing Your own money usually goes in first, and that catches people out. If your loan covers, say, 80% of the total cost, most lenders require your 20% contribution to be spent before they release a cent. So the builder’s deposit and early invoices often come straight from your savings or equity. In NSW, the Home Building Act 1989 caps that deposit at 10% of the contract price. Several costs also commonly sit outside the building contract, so the loan will not fund them unless they were in the approved budget from the start. Typical out-of-contract items include site costs, council and certifier fees, driveways, fencing, landscaping, window coverings and air conditioning. These can add tens of thousands of dollars, and they tend to fall due right at the end, when your repayments are at their peak. If your project is a smaller renovation instead of a structural build, it may not need a construction loan at all. Whether a renovation loan or a construction loan fits depends on the work, and an equity release broker can fund a modest renovation against your existing property in one lump sum. When the Build Doesn’t Follow the Script Real builds rarely run exactly to schedule, and the friction almost always shows up in one of three ways. The first is a builder invoicing ahead of stage, claiming the frame payment when the frame is only partly up, or asking for materials money early. Lenders generally will not release funds for incomplete stages, and their inspection process exists to catch exactly this. Paying an early claim from your own pocket is risky, because the
Renovation Loan or Construction Loan: Which Do You Need
Key Takeaways You have quotes, you have equity in the home, and the lender has started asking for council-approved plans and a fixed price contract. Nothing about a new kitchen felt like construction until that moment. Which product you end up with sits in lender credit policy, and it turns on what the work does to the building, whether the lender needs the finished value to make the numbers work, and how much of the loan is going into the build. Working out which side you land on before you sign a building contract is the part worth settling early, because the structure decides how the money reaches your builder and when. That is the first thing a construction loan broker checks when renovation plans come across the desk. The lender policies named here are examples only, current at the time of writing and subject to change without notice. What Pushes a Renovation Into Construction Lending Seven things move a job from a standard increase into a construction facility: Approvals Required for Structural Work New cabinetry, flooring, paint and a bathroom fit-out that leave the structure alone are usually funded as an increase on the existing loan. AMP Bank’s credit policy treats an extension or renovation involving structural changes that require council approval as a construction purpose. In New South Wales, that approval is either a development application through your council or a complying development certificate issued by a registered certifier. Valuations Based on Finished Value Where the lender needs the finished value to support the loan, the request becomes construction lending, whatever the work is called. Macquarie Bank’s credit guidelines state that home improvement or renovation loans relying on the on-completion value must be assessed as a construction loan, with the bank controlling the release of funds direct to the supplier on receipt of an invoice and a signed customer authority. Amounts Set by Lender Thresholds Dollar size pushes a file across on its own at some lenders. AMP requires a construction facility where the loan amount for construction is $100,000 or more. Macquarie sets a minimum construction loan of $150,000, so smaller jobs sit outside that product entirely and have to be funded another way. Land Values Measured Against Loan Size Macquarie’s policy allows equity release for structural renovations to remain a standard loan where the loan sits at or below 80% of the as-is valuation and does not exceed the land value of the security, with no building contract, council plans or progress drawdowns required. Two conditions still apply, being confirmation that a licensed builder is engaged for the structural work and the proposed build cost provided to the lender. On an established Sydney block where land carries most of the value, that pathway is often open. On a newer property where the dwelling carries most of it, often not. Dwellings Counted Under Development Limits Macquarie’s construction purpose covers the immediate building of up to two residential dwellings or renovations on an existing property, and it treats construction of more than two dwellings as development finance, which it lists as unacceptable. AMP finances a maximum of two dwellings simultaneously. A granny flat alongside the existing house sits inside that limit at both lenders. A third dwelling does not. Builders Engaged Under Fixed Price Contracts Macquarie requires the work to be performed by a fully licensed contracted builder and to commence within three months of the initial loan settlement. AMP excludes labour-only contracts, split contracts where the land contract names a specific builder, kit and relocatable homes, and non-arm’s length arrangements such as a family member’s building company working for a relative. Where your arrangement does not fit that shape, the construction product may be unavailable even though the work clearly is construction. Owner Builders Excluded From Policy Managing the build yourself takes the construction loan off the table at both lenders. Macquarie treats loans to owner builders as unacceptable, and AMP lists owner builders as an exclusion from construction lending. In New South Wales, an owner-builder permit is required where the reasonable market cost of labour and materials exceeds $10,000, with an approved education course required where the work is valued over $20,000. Funding an owner-built project usually means a standard release measured against as-is value. How Progress Payments Release the Money Under a construction loan, the money is released in pieces, against work a third party has confirmed is finished: Drawing Funds Against Completed Stages The building contract sets a schedule and the lender pays against it. Macquarie’s guidelines give a standard example of five stages: Five stages are standard and up to eight sit within Macquarie’s normal parameters. The bank checks that the schedule is not front-loaded, meaning no stage pays the builder more than the share of work actually completed by that point. Schedules and stage percentages differ by lender and by builder, so treat the figures above as a general guide. Contributing Borrower Funds Before Drawdown Your money goes in first. AMP requires the applicant’s own funds to be used before any bank loan funds are drawn, and requires the owner’s full equity at the initial land settlement on a knockdown rebuild. Borrowers who budgeted on the loan carrying the early stages are the ones caught by this, because the builder’s deposit often falls due before any of the facility is available. Ordering Inspections Before Stage Releases Someone independent confirms the stage is done. Macquarie requires valuer certification of only the first and final draws where the building contract is $600,000 or less, and a valuer inspection at every progress payment above that figure. AMP scales it by contract amount. Contracts up to $1.5 million need an as-if-complete valuation before the first payment and a final valuation at the end. Between $1.5 million and $2 million, an in-progress inspection at lock-up is added. Above $2 million, a quantity surveyor inspects at every stage, engaged at your cost. Testing Cost to Complete Against Undrawn Funds Before each release, AMP must be satisfied that