Building a home is different from buying an established property. Instead of receiving the full loan amount at settlement, funds are released in stages as construction moves forward.
Understanding construction loan progress payments Australian borrowers commonly encounter may help you prepare for each stage of the building process and understand how funds are released throughout construction.
Knowing how progress payments work for construction loans is important before signing a building contract. It may also help you understand how interest is charged and what lenders usually require before releasing funds.
What Are Progress Payments?
Progress payments are staged payments made by a lender during the construction process. Rather than providing the full loan amount upfront, the lender releases funds as specific milestones are completed.
This approach allows the lender to confirm that work has been carried out before the next payment is made.
Most construction loans in Australia follow a similar structure. However, the number of stages and the timing of payments may vary depending on the lender and the building contract.
Progress payments are common for:
- New home construction
- House and land packages
- Major renovations
- Knockdown and rebuild projects
- Investment property construction
How Progress Payments Work for Construction Loans
Many borrowers ask about how progress payments work for construction loans because they differ from standard home loans.
Once the loan is approved and construction begins, the builder completes sections of the project according to the agreed contract.
After a stage is finished, the builder sends an invoice. The lender then reviews the request and releases the required funds. Some lenders may arrange inspections before making payment.
This process continues until the project reaches completion.
Interest is generally charged only on the amount that has been drawn down, not the entire approved loan amount. As more funds are released, interest repayments may increase.
Why Lenders Use Progress Payments
Progress payments help lenders manage risk during the construction period.
They also provide a framework that aligns funding with completed work.
From a borrower’s perspective, staged payments may offer several practical benefits:
- Interest may initially apply only to funds already used.
- Payments follow the progress of the build.
- Builders receive funds according to the agreed milestones.
- Construction costs are monitored throughout the project.
Each lender has its own policies, so requirements may differ.
Common Construction Loan Stages in Australia
Although building contracts vary, most lenders use similar stages.
Understanding these milestones may make it easier to follow the payment process.
1. Deposit Stage
The first payment is usually the builder’s deposit required under the building contract. Maximum deposit amounts may be regulated under state-based building legislation and contractual arrangements.
Builders often require a deposit before commencing work.
The amount is subject to state regulations and contract terms.
2. Base Stage
The base stage covers the foundation work.
This may include:
- Site preparation
- Excavation
- Concrete slab
- Footings
Once completed, the builder requests the next payment.
3. Frame Stage
At this stage, the framework of the home is constructed.
This may include:
- External walls
- Roof trusses
- Structural components
The building starts to take shape during this phase.
4. Lock Up Stage
The lock-up stage is reached when external doors, windows, and roofing have been installed.
The dwelling can generally be secured at this stage because external doors, windows, and roofing have typically been installed.
Work commonly includes:
- Roofing
- Windows
- External doors
- Brickwork
5. Fit Out Stage
This stage focuses on internal features.
Typical work may include:
- Cabinets
- Plastering
- Tiling
- Electrical work
- Plumbing fixtures
Many visible finishes are completed during this period.
6. Completion Stage
The final stage occurs once the home is substantially complete.
Remaining items are addressed, and final inspections may take place.
The builder then requests the last payment.
These standard milestones form the basis of many construction loan stages and progress payments Perth borrowers experience.
Construction Loan Stages and Progress Payments Perth Borrowers Commonly Encounter
Building activity in Perth has continued to evolve, and many lenders servicing Western Australia follow the traditional six-stage structure.
However, some builders may use slightly different schedules depending on the project.
For borrowers dealing with construction loan stages and progress payments Perth builders commonly use, several factors may influence the process:
- Building contract requirements
- Land titles and approvals
- Weather conditions
- Availability of trades
- Variations during construction
- Lender policies
Delays may affect the timing of progress payments. This is why it is important to understand the payment schedule before construction starts.
What Happens Before Each Payment Is Released?
A progress payment usually follows several steps.
Builder Issues an Invoice
Once a stage is completed, the builder submits an invoice.
Lender Reviews the Request
The lender confirms that the amount aligns with the building contract and loan terms.
Inspection May Occur
Some lenders arrange inspections to confirm that work has been completed.
Not all stages require inspections.
Funds Are Released
After approval, payment is made to the builder.
The process then repeats until construction is finished.
Can Variations Affect Progress Payments?
Changes during construction are common.
A variation may involve:
- Upgraded fixtures
- Additional rooms
- Design changes
- Altered materials
Variations may increase the overall building cost.
Depending on your circumstances, additional funding may be required. Lenders assess these situations individually.
Before agreeing to variations, borrowers may wish to discuss the potential impact on costs, timelines and funding requirements with their builder and an authorised credit representative.
What If Construction Is Delayed?
Delays are not unusual.
Factors that may contribute include:
- Bad weather
- Material shortages
- Trade availability
- Council approvals
- Changes requested by the owner
Extended delays may affect the construction timeline.
Some lenders have maximum construction periods. If delays occur, additional documentation may be required.
Keeping communication open with your builder and lender may assist in managing unexpected issues.
What Costs Should Borrowers Plan For?
Building a home often involves costs beyond the contract price.
Examples may include:
- Site works
- Landscaping
- Fencing
- Driveways
- Window coverings
- Utility connections
- Council fees
Having a contingency amount may provide additional flexibility if unexpected expenses arise.
Borrowers should review their budget carefully before construction begins.
Can a Mortgage Broker Assist With a Construction Loan?
Construction lending can involve additional documentation and lender requirements compared with many standard home loans.
A mortgage broker or authorised credit representative may assist borrowers in understanding:
- Different lender policies
- Construction loan requirements
- Progress payment structures
- Documentation requirements
- Available loan features
Available lending options, loan structures and outcomes depend on individual circumstances and lender criteria.
Understanding Construction Loan Progress Payments
Construction loan progress payments Australian borrowers commonly encounter can vary between lenders, builders and individual projects. However, most construction loans follow a similar staged funding process, with funds released progressively as each stage of the build is completed.
Understanding how progress payments work for construction loans may help borrowers set realistic expectations around budgeting, interest costs, timelines and lender requirements throughout the construction process.
If you are planning to build a home and would like to understand construction loan structures, progress payment arrangements and lender requirements, FinanceCorp can provide credit assistance and explain available lending solutions offered by a range of lenders, subject to lender criteria and individual circumstances.
Based in Perth, Western Australia, FinanceCorp assists borrowers with construction loans, home loans, refinancing and investment property lending.
To discuss construction finance options, call 1300 410 784 or email admin@financecorp.com.au.
FinanceCorp provides credit assistance under Australian Credit Licence 395037.
Disclaimer
This information is general in nature and is provided for educational purposes only. It does not take into account your objectives, financial situation, needs or borrowing requirements. FinanceCorp provides credit assistance under Australian Credit Licence 395037.
The information provided is not a recommendation to apply for any particular loan product or lending structure. Before making decisions about obtaining credit or entering into a building contract, you should consider your individual circumstances and seek support from qualified professionals where appropriate.
Any information relating to borrowing capacity, interest rates, loan features, fees, lender policies or progress payment arrangements is general in nature only. These factors vary between lenders and may change over time.
Examples used throughout this article are illustrative only and should not be relied upon as an indication of borrowing capacity, loan approval or future lending outcomes.
Any taxation information is general in nature only. You should consult a registered tax agent or accountant regarding taxation matters.
Lending is subject to lender criteria, approval, terms, conditions, fees and charges.