What happens after my construction loan is approved?

Building your own home can be exciting but a lot of first-timers go into the construction process blind.

Gathering the documents you need to qualify for a construction loan can be stressful and what happens when construction starts?


How does it work?

Let’s imagine that you’ve bought your land and provided all of the relevant documents including a signed building contract and council approval.

With most lenders, construction will need to start within 6 months and be complete within 24 months so it’s important to get started as soon as you can.

The first thing you’ll normally have to do is pay your builder an upfront deposit to cover the initial cost of materials.

However, this really depends on the building contract you’ve negotiated.

Generally speaking, the deposit will be around 5% of the total building costs.

Your lender can actually cover this cost if you’ve provided them with all of the relevant building documents and make the lender aware of the upfront deposit from the outset.

Nevertheless, once the deposit is paid, the builder will commence the building stages.

Step 1: Clearing of the site

Depending on the nature of the land, there may be soil testing, site-levelling and clearing undertaken prior to actual construction.

Step 2: The slab or base stage

As the name suggests, this is simply when the foundation is laid.

It includes measuring out the design on the site, pouring the footings, under slab drainage, moisture barrier and special mesh for termite protection.

Step 3: Frame stage

This includes the installation of your internal and external support structure, along with walls, conduit for electrical and plumbing, the roof frame and sheeting, gutters and insulation.

Step 4: Lockup stage

It’s at this point where you can literally start “locking up” the property because your windows, doors and remaining walls will be installed.

It’s also safe for plumbers, electricians, cabinet makers and other tradesman to begin fitting out the property.

Step 5: Fit-out or fixing stage

Plumbing, electrical (including lights and powerpoints) and other fixtures and fittings will be installed.

The design features that make the property a home will also be added such as cornices, tiling, cabinets and shelving, reveals and architraves.

Step 6: Practical completion stage

This is basically where all painting, installations and detailing have been completed and you’re effectively ready to move in.

What about additional works?

Depending on your building contract, your driveway will still need to be poured and landscaping undertaken.

Other additional works may include installing your garage door, a verandah or even a shed.

Again, most building contracts don’t include these additional works (particularly swimming pools, which is a specialty area) so you’ll need to organise your own contractors for these jobs.

Nevertheless, once construction is complete, you generally have 3-6 months to notify the builder of anything else that needs to be fixed or repaird.

During the stages of construction, some aspects of the property can sometimes be overlooked or not completed to a high quality.

Make a list and make the builder aware in one go rather than going back and forth, which can cause delays.

Bear in mind, you may only notice problems during certain times of the year or in certain weather conditions, such as noticing a hole in the roof or a blocked stormwater pipe when it’s raining.


When do I make each progress payment?

The building contract should detail the progress payment schedule, which in itself should align with the completion of each stage.

In an ideal situation, you’ll receive an invoice from your builder at the end of each stage.

This is known as a “progress claim”.

All you’ll have to do is sign their tax invoice and give the signed invoice to the bank so they can authorise the next drawdown for your construction loan.

Once the builder has been paid for their completed work, they will move on to the next stage of construction.


How much do I pay at each stage?

The amount paid at each progress payment stage is based on a percentage of the total costs of completion.

As a general rule, the amount you pay at the different stages of construction is as follows:

  • The deposit: 5%
  • The slab or base stage: 15%
  • Frame stage: 20%
  • Lockup stage: 20%
  • Fit-out or fixing stage: 30%
  • Practical completion stage: 10%

It’s a little different in the Northern Territory:

  • The deposit: No more than 5%
  • The slab or base stage: 10%
  • Frame stage: 20%
  • Enclosed stage: 25%
  • Fixing stage: 30%
  • Practical completion stage: 7%
  • Final completion: 3%

Is the progress payment schedule in your best interest?

In most cases, around 90% of the construction loan is drawn down at the lockup stage even though it will still take around 3 months before construction is complete.

That means you’ll basically be making full mortgage repayments even before you actually take possession of your home.

It sounds a bit unfair but remind yourself that you can get a head start by making extra repayments on your home loan (if you’re on a variable interest rate) since you won’t have to worry about paying bills and rates just yet.

Besides that, an alternative payment schedule can actually put you at risk.

In recent years, some builders have been known to increase their early claim percentages and have small percentages at the end of the build.

For example, they may put in progress claims of to 60% of the total building costs in the first half of construction rather than the latter stages.

This presents a huge risk to you as the client because if your builder were to go out of business, you would have paid too much for the work completed so far.

Your building insurance may not even be able to save you since more money is required to complete your home than is left on the construction loan.

That’s why it’s important to get legal advice before signing a building contract.

Check out the Choosing A Builder page for golden tips on choosing a professional and reputable contractor.


How long does each stage of construction take?

It depends on the size and design of the build but generally speaking:

  • The slab or base stage: 1-2 weeks
  • Frame stage: 3-4 weeks
  • Lockup stage: 4 weeks
  • Fit-out or fixing stage: 5-6 weeks
  • Practical completion stage: 7-8 weeks

We’re construction loan specialists!

Whether you need a construction loan or you’re looking to release some equity for renovation work, our mortgage brokers understand construction better than most banks!

We can be the professional middle man between your builder and your bank to ensure communication is never lost, the loan and drawdown process is smooth and easy, and you’re kept up-to-date at all the stages of construction.

In that way, you can focus on turning the home of your dreams into a reality.

Call us on 1300 889 743 or complete our free assessment form to speak with one of our specialist mortgage brokers.

  • Allen White

    Hi home loan experts, is the amount you pay at different stages of construction the same everywhere except for Northern Territory? Just asking to confirm…

  • Hi Allen. Yes, aside from Northern Territory, the amount you pay at the different stages of construction is pretty much the same in all territories. However, please note that the amounts mentioned there are only a general guide so they may not be directly applicable to your situation.

  • Copland

    I’m only researching constructing because I couldn’t borrow more than 80% to buy a waterfront property. Any chance you guys can actually help me borrow more?

  • Hello Copland,

    The amount you can borrow can vary depending on the block the property is located in. However, it may actually be possible to borrow up to 100% of the property value with a guarantor loan. Please call us on 1300 889 743 or complete our free online assessment form to speak with one of them:
    https://www.homeloanexperts.com.au/free-quote/

  • Ruth J

    What if we need to get other minor work done i.e. landscaping, etc.? Will the bank release funds for this?

  • Hi Ruth,
    You should try and get all of these minor quotes included in the building contract and then have the builder pay for them though this may not work for the builder, so discuss this with us and your builder before deciding on the best way to go. Note that sometimes the banks will only release funds for other quotes on completion of construction. Be careful because you may have agreed to pay the contractor up front.

  • Debbie-Lee Camilleri Tews

    Hi following your guide our build would be 40% complete and yet our bank is telling us we are only 30% and wont release any progress payments, which without we cannot progress. Any advice on what we can do to rectify our situation. Very frustrated.

  • Hi Debbie-Lee,
    Sorry to hear that, it must be very frustrating. Normally these issues are sorted out prior to loan approval where the bank reviews the progress drawdown schedule and approves the loan based on those drawdowns. If you have met the requirements for each drawdown then they’ll pay your builder and it’s rare that there are any issues like this. I’d recommend that you consider getting a personal loan or credit card to pay for the shortfall until the end of construction as this is much easier than arguing with a bank. Of course you need to be able to afford the repayments on the additional debt.

  • Dee Suresh

    Hi,

    Is there any possibility of getting a loan refinanced at frame stage.

    Our lender is pretty pathetic and we regret the decision to go with them.

    If there is a possibility of refinancing at frame stage what happens to the Lmi which we paid approx 7k to fiance our loan.

    If you can please guide.

    Regards,

    Deevya

  • Hi Deevya
    It’s almost never possible to refinance during construction. Unfortunately it’s best to stick it out until the end and then consider refinancing.
    You would likely pay LMI again if you do refinance at the end unless your property has gone up in value. I’d recommend that you wait until you owe less than 80% of the property value and then give us a call and then we’ll be able to get you fantastic rates with no LMI.
    Many lenders are terrible at processing construction loans. Some even say to us as brokers that they do accept construction loans however their processes are terrible so it’s better to submit construction loans to other lenders.