Common Mistakes with Construction Loan Features

Construction finance works differently to a standard home loan, and the features built into these products determine how much you pay and when you pay it.

If you're planning to build in Mandurah, whether that's a custom design in Halls Head or a project home in Lakelands, the structure of your construction funding affects your cash flow from the first slab pour through to final handover. Most lenders only charge interest on the amount drawn down at each stage, not the full approved amount, but the way you manage those drawdowns and the contract you sign with your builder shapes the final cost.

How Progressive Drawdowns Actually Work

You only pay interest on funds released at each building stage, not the total loan amount. If your builder requests a drawdown for the slab and frame, you're charged interest on that portion while the rest of the approved amount sits untouched.

Consider a scenario where someone is building a custom home with a total construction cost of around the median for the area. The lender releases funds across five stages: base, frame, lockup, fixing, and completion. During the frame stage, only about 30% of the construction amount has been drawn, so interest applies to that portion alone. Once the builder completes lockup and requests the next progress payment, interest increases to cover the additional funds released. This progressive drawdown means your repayments start low and build as the project moves forward, which helps with cash flow if you're still renting or paying off another property while construction is underway.

Lenders typically require a progress inspection before releasing funds at each stage. The inspector confirms the work matches the stage claimed by the builder, and once approved, the lender pays the builder directly. You don't handle the money yourself.

Progress Payment Schedules and Fixed Price Contracts

A fixed price building contract locks in the total construction cost and sets out a clear progress payment schedule tied to building milestones. This contract protects you from cost blowouts and gives the lender confidence to release funds at each stage.

Without a fixed price contract, most lenders won't approve construction finance. The contract needs to show the total build cost, the payment stages, and the timeline for completion. In Mandurah, where building approvals through the City of Mandurah can take several weeks, having council approval and a signed fixed price contract in place before you apply for construction funding speeds up the process. Lenders want to see that your builder is registered, that the plans have council approval, and that the payment schedule aligns with standard industry stages.

A cost plus contract, where you pay for materials and labour as they're incurred plus a builder's margin, introduces uncertainty that most lenders won't accept for residential construction. Stick with a fixed price agreement unless you're an experienced owner builder with a lender that offers owner builder finance on different terms.

Interest-Only Repayment Options During Construction

Most construction loans offer interest-only repayments during the build, which means you're only paying interest on the drawn amount each month, not reducing the principal. This keeps repayments low while you're managing other costs like rent or an existing mortgage.

Once construction is complete and the loan converts to a standard home loan, you switch to principal and interest repayments unless you specifically arrange to stay on interest-only for a set period. The interest-only phase usually lasts for the construction period plus a few months, giving you time to settle in before repayments increase. If you're coordinating a build in an area like Golden Bay, where land and construction packages are common, this feature means you're not servicing a full mortgage while waiting for the builder to finish.

Some lenders allow you to make additional payments during construction if you want to reduce the balance early, but check whether your loan permits this without penalty. Not all construction products include an offset account during the building phase, so if you're holding savings you'd normally park in offset, confirm how your lender handles that before you sign.

Progressive Drawing Fees and What They Cover

Lenders charge a progressive drawing fee each time they release funds to your builder, and this fee covers the cost of inspections and administration. The fee typically ranges from around $300 to $500 per drawdown, depending on the lender and location.

Over a five-stage build, you could pay up to $2,500 in progressive drawing fees alone. Some lenders cap the total number of drawdowns, while others allow additional stages if your building contract requires them, though each extra stage means another fee. If your builder is working on a project home with a standard payment schedule, you'll usually stay within the lender's included drawdown limit. If you're building a custom design with more complex stages or you're an owner builder coordinating plumbers, electricians, and other sub-contractors yourself, confirm upfront how many drawdowns your lender includes and what the fee structure looks like beyond that.

In our experience, clients building in areas like Secret Harbour or Baldivis sometimes underestimate these fees when budgeting for settlement costs and early construction expenses. Factor them in from the start.

Land and Construction Packages vs Separate Land Purchase

A land and construction package bundles the land purchase and build into a single loan, with the lender releasing funds for the land first and then progressively for construction. If you've already bought the land separately, the lender refinances that purchase or uses it as security, then provides construction funding on top.

If you're buying a house and land package in an estate like Lakelands, the developer often has preferred builders and fixed designs, which makes the approval process quicker because the lender can see the full contract and council-approved plans upfront. If you've purchased land separately and you're engaging your own builder for a custom home, the lender needs to confirm the land is suitable for the build, that the development application has been approved, and that your builder can commence building within a set period from the disclosure date.

Some lenders require you to start construction within six or twelve months of settlement on the land. If delays occur with council plans or builder availability, and you exceed that timeframe, the lender may reassess your loan or charge a higher interest rate on the land portion until building starts. Speak to a mortgage broker in Mandurah who understands local council timelines and builder availability if you're working with separate contracts for land and construction.

When Construction Loans Convert to Permanent Loans

A construction to permanent loan transitions from progressive drawdowns during the build to a standard home loan once construction is complete. You don't need to reapply or refinance, the loan just converts automatically, and your repayment structure shifts from interest-only on drawn amounts to principal and interest on the full balance.

The conversion happens after final inspection and handover, and at that point the lender reassesses your repayment amount based on the total loan and the agreed term. If you've been paying interest-only on drawdowns during construction, your repayments will increase once the loan converts. In a scenario where someone building in Erskine has been paying interest on around half the loan amount during the build, their repayment might double once the loan converts and they're servicing the full balance on principal and interest terms.

Confirm with your lender whether the interest rate during construction matches the rate after conversion. Some lenders offer a different construction loan interest rate during the build, then shift you to their standard variable or fixed rate once the loan converts. If rates have moved between application and completion, your final repayment could differ from your original estimate.

If you're planning a renovation rather than a new build, a house renovation loan works similarly but may have fewer drawdown stages depending on the scope of works. The same progressive payment principles apply, and you'll still need a fixed price contract with a registered builder unless the lender offers specific terms for owner-managed projects.

Call one of our team or book an appointment at a time that works for you. We'll walk you through construction loan options from lenders across Australia and help you structure the finance around your building timeline and cash flow.

Frequently Asked Questions