Strategy
Construction Loans: Progress Drawdowns and the Risks Worth Pricing
Building a home in Australia in 2026 carries a different financing pattern to buying an established property. Construction loans release funds in stages as the build progresses, with interest charged only on the amount drawn. The structure works well when the build proceeds to schedule and budget; it can become punishing when contracts vary, valuations drift, or the end-loan transition is mismanaged. The conversation with a broker should start six months before the foundation goes in.
The fixed-price contract requirement
Australian lenders generally require a fixed-price contract from a licensed builder before a construction loan can be approved. The fixed-price requirement protects the lender's exposure: each progress payment can be confirmed against a contract milestone, and the total exposure is bounded.
Cost-plus contracts and unfixed-price arrangements are generally not acceptable to mainstream lenders for construction lending, even when the builder is reputable. Some specialist lenders may consider these structures with material additional documentation and equity, but the lender panel is significantly narrower and the rate premium is material.
The contract must come from a builder licensed in the relevant state. Owner-builder construction can be funded but operates under a different lender framework, with tighter LVRs and additional documentation requirements.
The standard progress payment schedule
Construction loans in Australia commonly draw down across five or six stages, aligned to specific construction milestones. The schedule varies by state and builder but generally follows this pattern:
- Deposit / slab: the foundation is poured. Typically the first major drawdown.
- Frame: the structural framing is complete and inspected.
- Lock-up: external walls, roofing, doors and windows are in place. The build is weatherproof.
- Fit-out / fixing: internal walls, cabinetry, plumbing, electrical and tiling are installed.
- Practical completion: final inspections, certification, handover.
- Some lenders separate practical completion into a final fifth and sixth drawdown depending on the contract structure.
The construction conversation starts six months before the foundation. The wrong lender or the wrong contract structure cannot be repriced once the slab is poured.
Interest mechanics during the build
Interest during construction is charged only on the amount drawn down, not the full loan amount. If $150,000 of a $600,000 facility has been released by the third progress payment, interest accrues on the $150,000.
Repayments during construction are typically interest-only. The borrower's outflow grows progressively as more of the facility is drawn. Some lenders allow capitalised interest during construction (the interest is added to the loan rather than paid each month), conditional on the facility's overall LVR position.
The build typically runs twelve to eighteen months from slab to practical completion, though delays are common and should be planned for. Lenders generally allow some flexibility in the build window but charge fees, request progress documentation, or step in if delays exceed agreed parameters.
Lender progress inspection fees and process
Each progress payment is conditional on a lender inspection to confirm the relevant construction milestone has been reached. Inspection fees commonly sit at $150 to $250 per inspection, charged at each drawdown stage. Across five or six stages, total inspection fees can reach $750 to $1,500 over the build.
Inspections are coordinated by the lender's panel valuer, not the builder. The builder submits a claim for the next progress payment; the lender requests an inspection; the inspector confirms the milestone; the funds are released. Misalignment between builder claims and inspector findings is a common source of delay.
Cost overruns and contingency
Cost overruns during a build are common, even on fixed-price contracts. Variations requested by the homeowner (kitchen upgrades, additional power points, landscaping) sit outside the contract. Site-specific issues (rock excavation, drainage, asbestos in pre-existing structures) can trigger contract variations from the builder.
Lenders generally do not extend the loan facility to cover variations or overruns mid-build. The borrower is expected to fund variations from cash, or to apply for a top-up facility (which may require fresh assessment, valuation, and serviceability checks).
Maxfin's recommendation is to budget a contingency of at least 5% to 10% of the contract value, held outside the facility. The contingency rarely goes unspent on a typical build.
Valuation drift and end-loan risk
The construction loan is approved against the on-completion value of the property: contract price plus land value. If property market values move materially down during the build, the on-completion valuation at practical completion may come in below the original approval.
When this happens, the borrower's LVR at practical completion can be higher than originally approved. In some cases the borrower may need to inject additional equity to settle, refinance to a different lender willing to lend at the higher LVR, or pay LMI on a position that was originally LMI-free.
The end-loan transition (from construction loan to standard mortgage on completion) is also a moment to test pricing. The construction lender may not be the most competitive lender for the standard loan that follows. Maxfin reviews the end loan as a separate decision, not a default continuation of the construction lender's product.
How Maxfin sequences a construction file
The firm starts with the contract review. Lender appetite for the specific builder, contract structure and inclusions varies. A contract that is technically valid but poorly drafted (vague variation clauses, weak progress payment definitions) can complicate every subsequent drawdown.
Lender selection is then matched to the build profile: project home with major builder, custom architect-designed build, knock-down rebuild on existing land, owner-builder. Each pattern has natural fits within the lender panel.
Maxfin coordinates the timeline so land settlement, construction loan approval, council approvals and builder mobilisation align. Each gate has its own timeline; missing one delays the others. The end-loan review is scheduled into the file from the outset rather than addressed at completion.
General information only. Not credit advice and not tax advice. Lending outcomes depend on individual circumstances and are subject to lender credit criteria, terms and conditions. Where tax considerations are described, they are general in nature; advice on a specific tax position should be obtained from a registered tax agent or accountant. Maxfin holds Australian Credit Licence 384406 and is not a registered tax agent.