Construction Loans: How They Work and What to Expect

If you’re building or renovating, a construction home loan allows you to access funds in stages as your project progresses. Instead of receiving the full loan amount upfront, payments (known as progress payments) are made directly to your builder at key milestones.

At Funded Finance, we guide you through every step of the construction loan process to ensure a smooth and stress-free experience. Below, we break down how construction loans work, the payment process, and what you need to know to keep your build on track.

How a Construction Loan Works

Once your loan is approved and your settlement is complete, generally, you’ll receive a Construction Pack, which includes:
✔ The approved loan amount
✔ A breakdown of the construction stages and payment process
✔ A list of required documents for progress payments
✔ Answers to common questions about construction loans

This pack is designed to help you understand what’s needed at each stage and avoid delays with your builder.

Construction Loan Interest & Repayments

While your home is being built, your loan is typically set up as:
✔ Variable interest rate – meaning your repayments may fluctuate with market rates
✔ Interest-only repayments – you only pay interest on the funds that have been drawn down, not the total loan amount

Once construction is complete, your loan will automatically switch to principal and interest repayments. If you’d like to switch earlier, we can discuss your options.

Construction Stages & Progress Payments

Your lender will release funds in stages as construction progresses. Payments are generally made directly to your builder upon completion of each milestone:

1️⃣ Foundation/Slab – ~20% of loan funds released
2️⃣ Frame – ~20% of loan funds released
3️⃣ Lock-up/External Lining – ~30% of loan funds released
4️⃣ Fixing/Internal Lining – ~20% of loan funds released
5️⃣ Practical Completion – ~10% of loan funds released

These percentages are general estimates and may vary depending on your builder’s contract.

How to Request a Progress Payment

At each stage, your builder will issue an invoice. To request a payment:

✅ Sign the invoice, including a note that states: "I/we authorise payment of this invoice."
✅ Submit the invoice to your broker or directly to your bank (keep us in the loop so we can follow it up!)
✅ Allow up to 5 business days for processing

If you’re contributing your own funds to the build, these must be paid to the builder before the first loan payment is released.

Progress Inspections: What to Expect

Lenders may require a progress inspection to verify construction is progressing as planned. These are usually required at:

✔ First and final stages for builds under $600,000
✔ Every stage for builds over $600,000

Inspections can take up to 10 business days, so it’s important to plan ahead to avoid delays.

Changes During Construction

If there are any changes to your build or contract (such as a new builder, additional work, or council-approved variations), please notify Funded Finance immediately so we can work with you and your lender for approval. Some changes may require a new valuation, which can take up to 10 business days.

If you’re changing builders, additional documentation will be required, including:
✔ A new signed building contract
✔ Updated progress payment schedule
✔ Stamped & certified council-approved plans
✔ Current Homeowner’s Warranty Insurance, Contract Works Insurance, and Public Liability Insurance

We can help you navigate this process to keep things moving smoothly.

What Happens When Construction is Complete?

Once the final payment is made, your construction loan will convert to a standard home loan. Any surplus funds from the loan (if applicable) will be returned to your account and may be available for redraw.

At Funded Finance, we’ll be here to support you beyond settlement—helping you manage your loan, explore refinancing options, and ensure your mortgage aligns with your financial goals.