Top tips to manage construction loan settlement

Settlement in construction finance works differently than standard home purchases

Construction loan settlement does not happen as a single event. Instead, your lender releases funds progressively as construction reaches predetermined stages, often five to seven times over the build period. Each drawdown is triggered by a progress inspection and requires formal approval before funds reach your registered builder.

This structure creates distinct settlement obligations at land purchase, then again at each construction milestone. Understanding how these work together prevents delays that can stall your build and trigger holding costs you had not budgeted for.

Land settlement happens first under most construction packages

When you arrange a land and build loan, you settle on the land component before construction begins. The lender disburses the full land amount at this first settlement, which typically includes stamp duty and conveyancing costs. Your loan account opens, and you start making repayments on the land portion immediately, usually on an interest-only basis during construction.

Once land settlement completes, the construction portion of your loan remains undrawn until your builder lodges the first progress claim. Most lenders require you to commence building within a set period from the disclosure date, often six to twelve months, depending on council approval timelines and site preparation requirements.

Consider a commercial lawyer purchasing in a newly released estate. Land settles in February, but the development application for the house design takes four months to gain council approval. Construction starts in June, meaning six months of interest-only payments on the land before any building funds are drawn. That holding period needs to be accounted for in your cash flow.

Progress payments are released against a fixed price building contract

Most lenders require a fixed price building contract before approving construction finance. This contract sets the total build cost and defines the stages at which your builder can claim payment. The typical schedule includes base stage, frame stage, lock-up stage, fixing stage, and practical completion, though variations exist depending on the builder and state regulations.

Your lender only releases funds after their valuer inspects the site and confirms the relevant stage is complete. The inspection fee, often called a progressive drawing fee, is charged each time and ranges from $150 to $400 per drawdown. Once the valuer approves, the lender disburses funds directly to your builder, not to you.

This process protects you and the lender by ensuring payments match actual work completed. However, it also means timing is critical. If your builder completes a stage but the inspection is delayed, or if the valuer identifies defects that need rectification before approving the claim, the builder may not receive payment on schedule.

Interest accrues only on the amount drawn down at each stage

During construction, you only pay interest on the combined total of land cost and whatever construction funds have been released so far. If your total loan is $800,000 comprising $300,000 for land and $500,000 for construction, and only two stages totalling $200,000 have been drawn, you are paying interest on $500,000, not the full $800,000.

This progressive drawdown structure keeps your repayments lower during the build, but it also means your repayment amount increases each time a new stage is completed and funds are released. Some commercial lawyers assume their repayments will remain static until construction finishes. They do not. Each drawdown increases the outstanding balance, which increases the interest charged in the following month.

Lenders typically offer interest-only repayment options during construction, switching to principal and interest once the build is complete and you take occupation. However, you can make additional payments during construction if your loan allows it, reducing the total interest you will pay over the life of the loan.

Final settlement transfers your loan from construction to permanent terms

Once your builder reaches practical completion and you receive the occupation certificate from the council, your lender conducts a final valuation. If the property value meets or exceeds the loan amount and all progress payments have been properly accounted for, the lender converts your loan from construction terms to standard home loan terms.

This is when your interest-only period typically ends, and you begin making principal and interest repayments on the full loan amount. Some lenders refer to this as a construction to permanent loan, where the same facility covers both the build phase and the ongoing mortgage without requiring a separate refinance.

If you have been making interest-only payments on $500,000 during construction, your repayments will increase noticeably once you convert to principal and interest on the full $800,000. Planning for this step-up in repayments is part of responsible construction loan management, particularly if your income is variable or you are managing other debt.

Cost plus contracts require different drawdown documentation

Some builders, particularly for custom design projects, use cost plus contracts rather than fixed price contracts. Under this arrangement, you pay the builder's actual costs plus an agreed margin, typically ten to twenty percent. This gives you more flexibility to make design changes during construction but requires more detailed documentation at each drawdown.

Lenders scrutinise cost plus contracts more carefully because the final build cost is not fixed upfront. You will need to provide invoices from subcontractors, receipts for materials, and evidence that the builder is paying suppliers on time. Each progress claim must be itemised, showing what work was completed and what costs were incurred.

Not all lenders offer construction finance for cost plus contracts, and those that do often require larger deposits or restrict loan-to-value ratios. If you are considering a cost plus arrangement, confirming lender appetite before committing to a builder is necessary.

Delays in council plans or approvals can affect your settlement timeline

Construction loan approval is conditional on receiving council approval for your building plans. If your development application is delayed or requires modifications, your construction start date shifts, which can affect the validity of your loan approval. Most lenders issue conditional approval for three to six months. If construction has not commenced by the time that period expires, you may need to reapply.

Delays also extend the period during which you are paying interest on the land without the offset of rental income or occupation. If you are holding your current residence while building, this can create dual housing costs that stretch longer than anticipated.

Some commercial lawyers use bridging loans to manage the transition between selling an existing property and completing a new build, but this adds another layer of cost and complexity. Wherever possible, aligning settlement dates with realistic construction timelines reduces the need for interim funding.

Call one of our team or book an appointment at a time that works for you. We work with lenders who understand construction finance and can structure your drawdown schedule to align with your builder's progress payment schedule and your cash flow.

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