A construction loan is designed to fund a build progressively. The lender approves the total project and then releases funds at defined construction stages after receiving invoices, progress requests and, where required, inspections or valuation confirmations. This protects both lender and borrower but makes preparation important.
- Funds are released in stages
- Interest is generally charged on drawn funds
- Variations can require extra cash
- Completed valuation matters
- Keep a contingency for overruns
How progress payments work
Typical stages may include slab or base, frame, lock-up, fixing and completion, although contract wording varies. The builder issues a progress claim and the lender releases the approved amount after its requirements are met.
Interest is generally charged only on funds already drawn, not the full approved construction limit from day one.
Variations can create cash gaps
Upgrades and contract variations after finance approval can increase the build cost without increasing the lender valuation. If the lender will not fund the variation, the borrower may need to contribute additional cash.
Keep a contingency rather than using every available dollar on the base contract.
Valuation and fixed-price contracts matter
Lenders usually assess the completed property value and the construction contract. If the “as if complete” valuation is below the total land-and-build cost, the borrower may need more funds.
Before signing, check that the builder, contract type, construction period and property are all acceptable to the proposed lender.
Frequently asked questions
Do I pay the builder directly?
Often the lender pays approved progress claims from the construction facility, although process varies.
Can I change the build after approval?
You can, but variations may need lender approval and additional cash.
What happens at completion?
The lender may require a final inspection, occupancy evidence and insurance before releasing the final payment.