The easiest way to structure a construction loan

How construction loan structures work

A construction loan releases funds in stages as your build progresses, charging interest only on the amount drawn down at each phase. You won't pay interest on the full loan amount until the build is complete, which makes the structure different from a standard home loan where you receive the entire sum upfront.

Most lenders use a progressive drawdown model tied to a progress payment schedule. Your builder submits claims at specific milestones such as slab pour, frame stage, lock-up, fixing, and practical completion. The lender arranges a progress inspection, and once satisfied, releases the next payment directly to the builder. You pay interest on whatever portion of the loan has been drawn down, usually on an interest-only basis during the construction phase.

Consider a scenario where you're building on land you already own in regional Queensland. Your total build cost is within the loan amount you've been approved for. At slab stage, 15 percent of the loan might be released. You're charged interest on that 15 percent only. At frame stage, another 20 percent is drawn down, and interest is calculated on the cumulative 35 percent. The remaining balance sits untouched until each subsequent stage is verified and paid.

Construction-to-permanent loan structures

This structure rolls construction finance and your ongoing home loan into a single approval. You apply once, settle once, and transition automatically from the construction phase to standard principal and interest repayments once the build is complete.

During construction, you make interest-only repayments on whatever has been drawn down. Once the build reaches practical completion and you receive your occupancy certificate, the loan converts to a standard variable or fixed rate mortgage. The interest rate during construction is typically variable, even if you intend to fix the rate once the build is finished.

For Queensland public sector employees, this structure works well when you're coordinating council approval, land purchase, and construction finance in one process. It avoids the need to reapply for finance or prove serviceability twice. If you're building a project home with a registered builder under a fixed price building contract, most lenders will structure the loan this way without requiring separate applications.

Standalone construction loans and end finance

Some borrowers separate the construction phase from the end loan. You take out construction funding specifically to complete the build, then refinance into a standard mortgage once the property is finished. This approach is less common but can suit owner builder finance scenarios or when you're using a cost plus contract where final costs aren't locked in.

The benefit is flexibility during the build. You're not committed to a single lender for both phases, which means you can shop around for better rates or features once the property is complete. The downside is the additional application process, settlement costs, and the risk that your circumstances change between approval and refinance.

In our experience, Queensland public sector employees with secure income rarely need this structure unless they're managing a custom design with variable scope or building as an owner builder. Most registered builders work within fixed price contracts, and lenders are comfortable approving construction-to-permanent structures on that basis.

How progressive drawdown schedules are set

Your progress payment schedule is agreed between you, your builder, and your lender before construction begins. The builder provides a breakdown of costs aligned to specific stages. The lender maps their drawdown schedule to match those stages, often adding a small buffer to ensure the builder is paid on time.

Typical stages include deposit, base and slab, frame, lock-up, fixing, and final completion. Some contracts split these further depending on the size and complexity of the build. Each stage is defined clearly in your building contract, and the lender won't release funds until a progress inspection confirms that stage is complete.

Lenders charge a Progressive Drawing Fee for each inspection and drawdown, usually between 300 and 800 dollars per stage. This covers the cost of sending a valuer or inspector to site. It's a one-off cost per stage, not an ongoing fee, and it's typically added to your loan balance rather than paid upfront.

Interest calculations during the construction phase

You're charged interest daily on the amount drawn down, not the total loan amount. If 40 percent of your loan has been released by lock-up stage, you're paying interest on 40 percent of the approved loan amount. The remaining 60 percent sits undrawn and incurs no interest.

Repayments during construction are interest-only. You're not reducing the principal, just covering the cost of the funds already released. Once the build is complete and the loan converts to principal and interest repayments, the full loan amount is drawn and your repayment structure changes.

At current variable rates, the difference between paying interest on a partially drawn loan versus the full amount can be significant over a six to nine month build. If your approved loan amount is substantial and your build timeline stretches due to wet weather or material delays, the progressive structure keeps your repayments manageable while construction is still underway.

Land and construction packages versus buying land separately

If you're purchasing land and building in a single transaction, lenders treat this as a land and construction package. The loan covers both the land purchase and the build cost. Settlement on the land happens first, then construction finance is drawn down progressively as the build advances.

If you already own the land outright or have an existing mortgage on it, the construction loan is structured as a top-up or standalone facility secured against that land. You'll need council approval and development application documentation before the lender will approve construction funding, regardless of whether you're buying land or building on land you own.

For Queensland public sector employees buying house and land packages in growth corridors, the land and build loan structure is standard. The developer often has preferred builder arrangements and fixed timelines, which makes the approval process more predictable. Lenders are familiar with these packages and typically approve them faster than custom builds on rural or vacant land without services connected.

What lenders assess before approving construction finance

Lenders want evidence that your build is viable, that your builder is solvent and insured, and that you can service the loan once construction is complete. You'll need a signed building contract with a registered builder, council plans, development application approval, and a detailed cost breakdown.

If you're using a fixed price contract, the lender assesses your serviceability based on the contract price plus land cost. If you're building under a cost plus contract, they'll apply a buffer to the estimated costs to ensure you can still service the loan if expenses increase. Owner builder applications require additional scrutiny, including proof of trade qualifications, insurance, and a detailed project plan.

Queensland public sector employees often benefit from LMI waivers on construction loans when borrowing above 80 percent, provided the lender offers that benefit for new home construction finance. Not all lenders extend these waivers to construction loans, so it's worth confirming at the application stage.

Managing delays and cost variations during construction

Builds rarely finish exactly on schedule. Wet weather, supply chain delays, and variations to the original scope all extend timelines and sometimes increase costs. Your construction loan needs to accommodate that.

If the build takes longer than expected, you'll continue making interest-only repayments on the drawn amount until practical completion. Most lenders allow for a 12 month construction period in their initial approval, with extensions available if required. If costs increase due to variations, you may need to seek additional approval or cover the difference from your own funds, depending on how much buffer was built into the original loan amount.

It's not uncommon to see builds in South East Queensland stretch to nine or ten months due to weather, particularly during summer storm season. Lenders understand this, but they'll want regular updates if the timeline shifts significantly from the original schedule.

When to start the construction loan application

You'll need council approval and a signed building contract before most lenders will formally approve construction finance. That means you should commence building within a set period from the Disclosure Date once approval is issued, typically three to six months depending on the lender.

If you're still at the design or development application stage, you can discuss your borrowing capacity and structure with a broker, but formal approval won't be issued until the build is ready to proceed. Some borrowers seek conditional approval earlier to confirm their budget, then return once contracts are signed and council plans are approved.

For Queensland public sector employees coordinating land purchase and construction, timing matters. If you settle on land before your construction loan is fully approved, you'll need to service any land loan repayments while waiting for the build to start. If you delay settlement until construction finance is confirmed, you risk losing the land if the seller won't extend. A construction loan that structures both phases together avoids this timing risk.

Choosing between variable and fixed rates on construction loans

During the construction phase, most lenders keep the loan on a variable rate. Once the build is complete and the loan converts to a standard mortgage, you can choose to fix part or all of the balance.

Some lenders allow you to lock in a fixed rate at the time of approval, even though the funds won't be fully drawn until months later. This protects you if rates rise during construction, but it also means you're committed to that rate even if market rates fall before the build finishes.

In our experience, Queensland public sector employees building over a six to twelve month period often prefer to stay variable during construction, then reassess once the property is complete. It provides flexibility if the build is delayed or if your financial circumstances change, and it avoids break costs if you need to adjust the loan structure before settlement.

Call one of our team or book an appointment at a time that works for you. We'll walk through your build timeline, contract structure, and lender options to make sure your construction finance is set up correctly from the start.

Frequently Asked Questions