What Happens During Construction Loan Settlement
Construction loan settlement is different from a standard home purchase because funds are released in stages as your build progresses, not as a single lump sum. Each drawdown is triggered by a progress inspection that confirms the work has been completed to an acceptable standard, and you only pay interest on the amount released so far.
Werribee has seen steady growth in new builds, particularly in the northern and western pockets where land and construction packages are common. If you're building in one of these developing areas, understanding how the drawdown process works will help you coordinate payments with your builder and avoid delays that can push out your completion date.
How Progressive Drawdowns Are Released
Most lenders release construction funding in four to six stages, aligned with key milestones in the build. A typical progress payment schedule includes base stage (slab or frame complete), frame stage, lockup stage (roof and windows on), fixing stage (internal fit-out), and practical completion. Each stage requires a progress inspection arranged by the lender, and funds are released directly to the builder once the inspector confirms the work matches the contract.
The exact schedule depends on your fixed price building contract and the lender's policy. Some lenders charge a Progressive Drawing Fee at each stage, usually between $300 and $500 per inspection. These fees are separate from your loan amount and need to be paid upfront or added to the drawdown.
Consider a buyer building a four-bedroom home in Werribee's growth corridor with a land and build loan. The contract price covers the full build, and the lender agrees to release funds in five stages. At base stage, the lender releases the first payment after the slab is poured and inspected. The buyer is now paying interest only on that portion, not the full loan amount. This continues at each stage until practical completion, when the final drawdown is released and the loan converts to a standard home loan with principal and interest repayments.
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What Documents You Need for Each Drawdown
Before each payment is released, the lender needs proof that the stage is complete. Your registered builder submits a claim form that details the work done and the amount due under the progress payment schedule. The lender then arranges a progress inspection, and the inspector provides a report confirming the stage is finished and complies with the contract and council approval.
You won't need to gather documents for every drawdown once the loan is approved, but you do need to make sure the builder submits claims on time. Delays in lodging paperwork can push out your settlement date and leave you paying rent while the build sits idle. If you're working with a project home builder in Werribee, most are familiar with lender requirements and stay on top of the process. If you're doing a custom design or managing a cost plus contract, you'll need to be more involved in coordinating the claims.
When the Loan Converts to a Standard Home Loan
Once the build reaches practical completion and you receive the keys, the construction loan converts to a standard home loan. The full loan amount is now drawn, and your repayments switch from interest-only to principal and interest unless you've arranged otherwise. Some lenders automatically convert the loan, while others require you to sign a new loan agreement or confirm the final loan amount.
If you've been living elsewhere during the build, this is the point where your cash flow changes significantly. During construction, you might have been paying $1,500 a month in interest on the drawn portion. After conversion, principal and interest repayments could be $3,500 or more, depending on the loan amount and interest rate. If you're also paying rent during the build, make sure you've budgeted for the jump in repayments once you move in.
Werribee's affordability compared to inner western suburbs makes it a popular choice for first home buyers building new homes, but the transition from construction to permanent finance can catch people off guard if they haven't planned for the full repayment amount.
Interest Costs During the Build
You only pay interest on the amount drawn down at each stage, not the full loan from day one. If your total loan amount is $500,000 and the first drawdown is $100,000, your interest cost for that period is calculated on $100,000. As each stage is released, the interest cost increases.
Most lenders offer interest-only repayment options during construction, which keeps your repayments lower while you're still paying rent or covering other housing costs. The interest rate applied during construction is usually the same as the rate that applies once the loan converts, but some lenders charge a slightly higher construction loan interest rate during the drawdown phase.
If your build is delayed, your interest costs will run longer than expected. A build scheduled to take six months might stretch to nine or ten if there are weather delays, supply issues, or problems with council plans. Budget for a longer construction period than the builder estimates, and keep a buffer in your savings to cover the extra interest.
What Happens If the Build Goes Over Budget
If the build costs more than the original contract, you'll need to cover the difference yourself or apply for additional funding. Lenders approve construction finance based on the fixed price contracts you provide at application, and they won't release more than the approved amount without reassessing your borrowing capacity.
Variations to the original contract are common, especially if you upgrade finishes or make changes during the build. These costs are usually due before practical completion, so you need cash on hand or access to another funding source. If the variation is significant and you can't cover it, the build can stall.
In our experience, buyers building in Werribee's newer estates sometimes underestimate the cost of site works, particularly if the block has poor soil conditions or requires extra fill. These costs aren't always included in the base contract and can add tens of thousands to the final bill. If you're buying suitable land in an area with known soil issues, factor in extra costs before you commit to the build.
How Long Settlement Takes After Practical Completion
Once the build is finished and you've completed the final inspection, the builder issues a certificate of practical completion. The lender releases the final drawdown, and the loan converts to a standard home loan. This process usually takes a few days to a week, depending on the lender's processing time.
You can move in once practical completion is reached, but there may still be minor defects or unfinished work. The builder is responsible for fixing these during the defects liability period, which is usually three months. The final payment to the builder is sometimes held back until all defects are resolved, but this depends on the contract terms.
If you're refinancing or switching to a different lender after the build, you can do this after the loan converts, but you'll need a full valuation of the finished property. Most buyers stick with the original lender for at least the first year to avoid exit fees, then review their refinancing options once the property is established.
Call one of our team or book an appointment at a time that works for you. We'll walk through the entire construction drawdown process, help you understand what to expect at each stage, and make sure the loan structure suits your situation once the build is complete.
Frequently Asked Questions
How are construction loan funds released during a build?
Funds are released in stages as your build progresses, usually at base, frame, lockup, fixing, and practical completion. Each stage requires a progress inspection, and the lender releases payment directly to the builder once the inspector confirms the work is complete.
Do I pay interest on the full loan amount during construction?
No, you only pay interest on the amount drawn down at each stage. If the lender has released $150,000 so far, your interest cost is calculated on that amount, not the full loan. Interest costs increase as each new stage is released.
When does a construction loan convert to a standard home loan?
The loan converts once the build reaches practical completion and the final drawdown is released. At this point, your repayments usually switch from interest-only to principal and interest, unless you've arranged otherwise with the lender.
What happens if the build costs more than the approved loan amount?
You'll need to cover the extra cost yourself or apply for additional funding. Lenders won't release more than the approved amount without reassessing your borrowing capacity, so variations or unexpected costs need to be paid from your own savings.
How long does settlement take after the build is finished?
Once practical completion is reached, the lender releases the final drawdown and the loan converts within a few days to a week. You can move in at this point, but minor defects may still be fixed during the defects liability period.
