Why it works differently to a standard home loan
With an established property the lender pays the full price at settlement and your repayments start at full size. With a build there is nothing finished to pay for yet. The lender releases the money in pieces, called progress payments or draws, as the builder completes each stage. Each draw is paid to the builder against an invoice, and the lender will often want confirmation that the stage is complete before releasing it.
The usual stages
Contracts differ between builders and between states. A typical build is paid in stages like these. The percentages are a common pattern only. Your building contract sets the real ones.
- Deposit: paid when the building contract is signed, commonly around 5%.
- Base or slab: when the foundations and slab are down, commonly around 10%.
- Frame: when the wall and roof frames are up, commonly around 15%.
- Lock up: when the external walls, roof, windows and doors are on, commonly around 35%.
- Fixing or fit out: when the internal linings, cabinets and fittings are in, commonly around 25%.
- Practical completion: when the home is finished and ready to hand over, commonly the final 10%.
The land is separate. It usually settles first and in full, before the slab is poured, so the land portion of the loan is drawn from the beginning.
What happens to your repayment
During construction most lenders charge interest only on the amount drawn. Here is an illustration for a build of $350,000 at an illustrative rate of 6.5% a year, using the stage pattern above. These are not quotes.
- After the deposit and slab, $52,500 is drawn and the interest is about $280 a month.
- After the frame, $105,000 is drawn and the interest is about $570 a month.
- After lock up, $227,500 is drawn and the interest is about $1,230 a month.
- After fixing, $315,000 is drawn and the interest is about $1,710 a month.
- At completion the full $350,000 is drawn and the interest is about $1,900 a month.
Interest on the land sits on top of that for the whole period. On land of $300,000 at the same illustrative rate it is about $1,625 a month from the day the land settles.
Where people get caught out
- The jump at lock up. It is the largest single draw, so the monthly interest can roughly double in one step.
- The gap at the end. After the final draw you are paying interest on the full loan, but the property still needs a final inspection, a handover and a tenant before it earns anything.
- Variations. Changes you ask for during the build are usually paid from your own funds, not from the loan.
- Delays. Every extra month is another month of interest on whatever has been drawn.
- The switch after completion. Many construction loans change to principal and interest repayments once the build is finished, which lifts the repayment again.
How to plan for it
- Ask your broker for a month by month estimate of interest across the build, not only the final repayment.
- Hold a buffer that covers two to three months beyond the expected completion date.
- Read the stage schedule in the building contract before you sign it.
- Ask whether your lender offers a pause on repayments during the build, and what it would add to the loan. We cover that in paused repayments during construction.
A licensed broker will give you the real figures for your loan. We keep the build timeline and the finance timeline in step so the draws arrive when the stages do.