Understanding the Basics of Construction Loan Structures

A construction loan releases funds in stages as your build progresses, rather than as a single lump sum at settlement.

Most community pharmacists understand standard home loans, but construction finance works differently because the asset you're borrowing against doesn't exist yet. Lenders release funds progressively as each stage is completed, and you only pay interest on what's been drawn down. Understanding how this structure works will help you budget accurately and avoid surprises during your build.

How Construction Loan Drawdowns Are Structured

Funds are released in instalments tied to specific building milestones, not calendar dates. A typical progressive drawdown might include a deposit payment when contracts are exchanged, a base stage payment once the slab is poured, a frame stage payment when the frame and roof are complete, a lock-up stage payment when windows and external doors are installed, and a final payment at practical completion. Your lender will arrange a progress inspection before releasing each payment, and you'll only be charged interest on the amount drawn down so far.

Consider a community pharmacist building in a regional area with a fixed price building contract. The land costs $180,000 and the build costs $420,000. If the pharmacist already owns the land outright, the lender might release funds across five stages. After the base stage is complete and $100,000 has been drawn, interest is calculated only on that $100,000, not the full $420,000 loan amount. This keeps repayments lower during construction, which matters if you're still paying rent or covering another mortgage while the build is underway.

Lenders typically charge a progressive drawing fee for each inspection and drawdown, usually between $150 and $400 per stage. Some lenders cap the number of draws included in the loan, while others allow unlimited draws but charge per inspection. If you're planning a custom design with multiple payment milestones, confirm the fee structure before you apply.

Interest-Only Repayments During Construction

You'll usually make interest-only repayments during the construction phase, then switch to principal and interest once the build is complete. This arrangement keeps your repayments lower while you're managing both the build and your current housing costs. The interest-only period typically lasts up to 12 months, though some lenders will extend this to 18 or 24 months if your construction timeline is longer.

Once the build reaches practical completion, the loan converts to a standard principal and interest home loan. You'll receive a new repayment schedule at that point, and the interest rate may also adjust depending on whether you started with a construction-specific rate or a standard variable rate. Some lenders offer a construction to permanent loan, which means you apply once and the loan automatically converts when the build is done. Others require a separate application to refinance from construction to permanent, though this is less common now.

Land and Construction Packages Versus Cost Plus Contracts

A fixed price building contract sets the total build cost upfront, which makes budgeting and loan approval more straightforward. The lender knows exactly how much you need, and your repayments won't change unless you make variations. Most project home builders and house and land packages use fixed price contracts, and lenders generally prefer this structure because the risk is lower.

A cost plus contract charges you the actual cost of materials and labour plus a builder's margin, usually between 10% and 20%. This structure is more common with custom builds or owner builder finance, but it introduces uncertainty because the final cost isn't locked in. Lenders are more cautious with cost plus contracts and may require a larger deposit or cap the loan amount at a lower percentage of the estimated build cost. If you're using a cost plus contract, expect the lender to ask for detailed quotes from sub-contractors, including plumbers and electricians, before they approve the loan.

In our experience, community pharmacists who are building a custom home on suitable land they already own sometimes assume a cost plus contract will give them more control over the build. The trade-off is that lenders treat these applications differently, and you'll need a larger cash buffer to cover potential cost overruns. If you're comfortable with that, the flexibility can be worthwhile. If your budget is tight, a fixed price contract is the more predictable option.

When Construction Must Commence After Approval

Most construction loan approvals require you to commence building within a set period from the disclosure date, typically six to 12 months. If the build doesn't start within that window, the approval may lapse and you'll need to reapply. This matters if you're waiting for council approval or a development application to be finalised, because the clock starts ticking from the date your loan is formally approved, not from the date you're ready to build.

If you're buying a land and construction package and you know council plans will take time, consider delaying your loan application until approvals are closer to being finalised. Alternatively, some lenders will extend the commencement period if you can demonstrate that the delay is due to council processes rather than a change in your circumstances. Your broker can request an extension before the approval expires, but it's not automatic.

Using a Registered Builder and How That Affects Your Loan

Lenders require that construction is completed by a registered builder, and they'll ask for evidence of registration and appropriate insurance before they release any funds. If you're planning to act as an owner builder, your loan options are more limited and you'll need specialist owner builder finance. Most mainstream lenders won't fund owner builder projects unless you can demonstrate relevant trade qualifications and experience, and even then, they may cap the loan at 70% or 80% of the combined land and build value.

If you're using a registered builder, the lender will also want to see proof of a fixed price building contract, evidence that the builder holds the required licences in your state, and confirmation that the builder has Home Owners Warranty insurance in place. Without these, the loan won't proceed. Some lenders will also want to see that the builder is financially stable, particularly if you're using a smaller or newer builder rather than a well-known project home company.

Refinancing After Your Build Is Complete

Once your build reaches practical completion and the loan converts from construction to permanent, you may want to refinance for a lower rate or to access equity for another purpose. Some lenders offer a better rate on their standard home loan product than on their construction loan, so it's worth comparing once the build is done. If you started with a construction-specific lender who doesn't offer ongoing competitive rates, refinancing within the first 12 months can save you several thousand dollars in interest over the life of the loan.

If you're planning to renovate your house after the initial build is complete, the equity you've created during construction can sometimes be used to fund that work without needing a separate loan. This is particularly relevant if you've built in an area where property values have increased during your build period, as you may have more equity available than you initially expected.

Call one of our team or book an appointment at a time that works for you. We'll walk through your build timeline, confirm which lenders will fund your project, and structure the loan so your repayments stay manageable while construction is underway.

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