Key Takeaways
- Construction loans are drawn down in stages, typically slab, frame, lock-up, fixing and completion, with each progress payment paid straight to your builder against an invoice.
- Interest is charged only on the funds drawn so far, and repayments are typically interest-only during the build.
- Your own contribution usually goes in first, so the builder’s deposit and early costs often come out of your pocket before the loan starts drawing.
- Lenders hold back the final payment until the occupation certificate and final inspection confirm the home is complete.
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.
- Slab draws around $75,000 (15%), lifting the balance to $75,000 and monthly interest to roughly $375.
- Frame draws around $100,000 (20%), lifting the balance to $175,000 and monthly interest to roughly $875.
- Lock-up draws around $125,000 (25%), lifting the balance to $300,000 and monthly interest to roughly $1,500.
- Fixing draws around $125,000 (25%), lifting the balance to $425,000 and monthly interest to roughly $2,125.
- Completion draws the final $50,000 (10%), lifting the balance to $475,000 and monthly interest to roughly $2,375.
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 lender may not reimburse you, so check the claim against the contract and let the lender’s process do its job.
The second is variations, changes to the contract after signing, whether your upgrades or unexpected site issues. Because your loan was approved against the original contract price, a variation is not automatically funded. Small variations are usually paid from your own funds, while larger ones may require the lender to reassess the loan, sometimes with a new valuation. Get every variation documented and priced in writing before the work is done.
The third is the final-stage holdback. Lenders typically will not release the completion payment until they receive the occupation certificate, the council or certifier’s confirmation that the home is legally fit to occupy, and a satisfactory final inspection or valuation. The holdback exists so the money and the finished, certified home change hands together. This is where a Sydney mortgage broker helps, since lender construction departments differ in how quickly they move on inspections.
Cash Flow You Can See Before You Sign
Progress payments protect you. Money leaves the loan only as the home takes shape, and interest builds gradually instead of landing all at once. The owners who sail through construction are the ones who understood the sequence before signing, so their own funds go in first, out-of-contract items are budgeted, and the completion holdback is expected.
If you want the stage schedule, inspections and cash-flow plan mapped out before you sign a building contract, the team at DIY Lending can compare how construction drawdowns are handled across more than 40 lenders.
Frequently Asked Questions (FAQs)
1. What are progress payments on a construction loan?
Progress payments are staged releases of your construction loan, paid directly to your builder as each phase of the build is completed. Instead of receiving the full loan at settlement, funds are drawn down against builder invoices, typically at slab, frame, lock-up, fixing and completion, with the lender often inspecting before paying.
2. Do I pay interest on the whole construction loan from day one?
No. Interest is charged only on the funds drawn so far, so your repayments start small and increase as each stage is paid. During construction, repayments are typically interest-only, converting to principal-and-interest once the final progress payment is made and the build is complete.
3. Who pays the builder’s deposit?
Usually you do, from your own funds. Most lenders require your contribution to the project to be spent before the loan starts drawing, and the deposit falls at the very start. In NSW, the Home Building Act 1989 caps the deposit at 10% of the contract price, and builders commonly ask for 5% to 10%, so factor it into your cash planning.
4. What happens if my builder asks for money ahead of a stage?
Lenders generally will not release a progress payment until the stage is genuinely complete, and many verify this with an inspection. Paying an early claim from your own pocket is risky, because the lender may not reimburse you. Check the claim against your contract before agreeing to anything.
5. Are landscaping, driveways and fencing covered by the loan?
Often not. Items outside the fixed-price building contract, such as landscaping, driveways, fencing and window coverings, are only funded if they were in the approved loan budget with quotes up front. Otherwise, they come from your own funds, usually right at the end of the build.
6. Why is the final payment held back?
Lenders hold the completion payment until they receive the occupation certificate and a satisfactory final inspection or valuation. This confirms the home is finished and legally fit to occupy before the last of the money is released, protecting you from paying in full for an incomplete or uncertified build.
This article is general information only. It does not take your objectives, financial situation or needs into account, and you may wish to speak with a qualified professional before acting.