How construction loan progress payments work

Why lenders release funds in stages

Progress payments align loan drawdowns with completed work. This helps the lender manage the value of its security and means the borrower generally pays interest only on the amount drawn at that point, rather than the entire approved construction limit from day one.

The exact stages and requirements vary by lender and contract. A common sequence includes slab or base, frame, lock-up, fit-out and completion. Some contracts include different or additional milestones.

What happens at each stage

• The builder completes a stage and issues an invoice or progress claim.
• You check the work and authorise payment if satisfied.
• The lender reviews the request and supporting documents.
• A valuation or inspection may be required, particularly at key stages or completion.
• Once approved, the lender pays the builder from the construction loan.

Your contribution may be used first

Many lenders require the borrower’s agreed cash contribution to be paid before lender funds are released. This can materially affect early-build cashflow, so confirm when your money is needed rather than assuming it can stay in reserve.

The land loan and construction facility may also settle or draw at different times. If you are buying land and building, the timing and valuation of both components need to be planned together.

Interest and repayments during construction

During progressive drawdown, repayments are commonly interest-only on the amount already advanced. The interest cost normally rises as more stages are paid. At or after completion, the loan generally converts to the agreed ongoing repayment arrangement.

Policies differ, so confirm whether interest must be paid from your cashflow or may be capitalised, what fees apply to drawdowns or inspections, and when principal-and-interest repayments begin.

Variations are where budgets can unravel

Changes to plans, finishes or site works can increase the contract price. The lender may not automatically fund a variation, even where the overall loan was approved. Notify the lender or broker before agreeing to material changes.

Keep a genuine contingency for site costs, variations, rent or existing mortgage payments, delays and items outside the building contract such as landscaping, window coverings or some connection costs.

Before authorising the final payment

Final drawdown commonly requires a satisfactory final valuation or inspection, confirmation that the work matches approved plans and evidence of suitable building insurance. Your building contract and state-based rights also matter.

Consider an independent building inspection and obtain legal advice about the contract and any defects. A lender’s valuation or inspection is for lending purposes and is not a substitute for your own quality checks.