Understanding the Basics of Construction Loan Fees

What Fees Apply to Construction Finance

Construction finance attracts fees that standard home loans don't charge. The most significant is the Progressive Drawing Fee, which covers the cost of sending a valuer or inspector to your build site each time the builder requests funds. Most lenders charge between $300 and $600 per progress inspection, and the typical house build requires five to six progress payments. You'll also face a standard loan application fee, usually between $400 and $1,200, and a settlement fee at the end when the loan converts from construction to standard mortgage.

Consider a Tasmanian Government employee building in Sorell. The land costs $180,000, and the fixed price building contract sits at $420,000. The lender approves a land and construction package based on the combined value. The builder lodges five progress claims over nine months. At $450 per inspection, the Progressive Drawing Fee alone adds $2,250 to the build cost. The application fee is $600, and the final settlement fee is $350. The total fee load is $3,200 before any other building costs.

These fees sit outside the loan amount in most cases. Some lenders allow you to capitalise the Progressive Drawing Fee into the loan, but that increases your total debt and the interest you'll pay over the life of the loan. Others require payment from your own funds at each drawdown.

How Progress Payment Finance Works

Lenders only charge interest on the amount drawn down at each stage, not the full approved loan amount. During construction, your repayments start low and increase as more funds are released. Most construction loans for public servants offer interest-only repayment options during the build phase, which keeps your cash flow manageable while you're still paying rent or living elsewhere.

The builder submits a claim after completing each stage, such as base stage, frame stage, lock-up, and fixing. The lender arranges a progress inspection to confirm the work matches the claim. Once approved, the funds go directly to the builder, and your loan balance increases by that drawdown amount. Your interest repayments adjust accordingly.

In a scenario where the first progress payment is $80,000, you'll pay interest only on that $80,000 until the next drawdown. If the second payment is another $100,000, your interest calculation then applies to $180,000. This progressive drawdown structure protects you from paying interest on money you haven't yet used, but it also means your repayments step up several times during the build.

Fixed Price Building Contract vs Cost Plus Contract

The type of building contract affects your finance approval and fee structure. A fixed price building contract states a set amount for the entire build, which lenders prefer because it limits risk. The builder agrees to complete the home for that price regardless of cost variations, provided the scope doesn't change. Most Tasmanian Government employees building a new home will use a fixed price contract with a registered builder, and this typically results in smoother finance approval.

A cost plus contract charges the actual cost of materials and labour plus a builder's margin, usually around 15 to 20 per cent. Owner builder finance often involves cost plus arrangements, and lenders view these as higher risk. Approval criteria tighten, and some lenders won't offer construction finance at all for cost plus projects. Where they do, expect higher interest rates and stricter progress payment conditions.

If you're arranging owner builder finance or working with a cost plus contract, the lender may require more detailed documentation at each stage, including receipts for materials and invoices from sub-contractors like plumbers and electricians. This increases the administrative load on your side and may slow down progress payments if paperwork isn't lodged correctly.

Timing Requirements and Build Commencement

Most lenders require you to commence building within a set period from the Disclosure Date, typically six to twelve months. If council approval or development application delays push you past that window, the lender may withdraw the offer or require a new application with updated income and property details. This becomes relevant in regional Tasmania, where council plans can take longer to finalise than in Hobart.

Once the build starts, lenders also expect it to finish within a reasonable timeframe, usually twelve months for a standard home. If the build stalls, the lender may charge a holding fee or move the loan to a higher interest rate. Weather delays in winter or supply chain issues can push timelines out, and while lenders usually allow some extension, it's worth discussing contingency terms before you sign the construction loan application.

Some lenders also set conditions around the land. If you've purchased suitable land but haven't yet secured council approval, the finance may be conditional on that approval being granted. If the development application is rejected or requires significant changes, the loan offer may lapse.

Fees That Don't Appear on the Loan Statement

Beyond the lender's fees, construction finance involves costs that sit outside the loan but still affect your budget. Council approval fees vary by municipality, but in Tasmania they typically range from $1,500 to $3,500 depending on the size and complexity of the build. If your plans require a development application rather than straightforward council plans, expect higher fees and longer processing times.

You'll also need to budget for insurance during construction. Most lenders require building insurance from the day construction starts, and this usually costs between $1,200 and $2,500 for the build period. Your existing contents insurance won't cover a partially built home, so this is a separate policy.

If you're building a custom design rather than selecting from a project home loan portfolio, architect or designer fees can add $10,000 to $30,000 depending on the complexity. These costs are due before construction starts, so they need to come from your deposit or savings rather than the construction funding.

When to Review Your Loan Structure

Once the build finishes and the loan converts to a standard mortgage, it's worth reviewing your loan structure. During construction, you're on interest-only repayments at a construction loan interest rate, which is often slightly higher than the lender's standard variable rate. After conversion, you can switch to principal and interest repayments or maintain interest-only if you're using the property as an investment.

Some lenders automatically roll you onto their standard variable rate after conversion, which may not be their most competitive product. Others keep you on the same rate but remove any offset account features or redraw restrictions that applied during construction. If you haven't reviewed your options at this point, you may end up paying more than necessary. A loan health check after the build completes can identify whether refinancing to a lower interest rate makes sense, particularly if your employment status or borrowing capacity has improved since the original application.

The conversion itself usually attracts a settlement fee, which is separate from the initial application and progress drawing fees. This can be another $300 to $600, though some lenders waive it if you're staying with the same product. Make sure this fee is disclosed upfront so it doesn't arrive as a surprise when the final valuation is complete.

Call one of our team or book an appointment at a time that works for you to discuss how construction finance applies to your circumstances and what fee structure suits your build timeline.

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