Construction loans in Australia: the 5 stages, cash flow reality and what your builder won't tell you

TL;DR. Australian construction loans release funds in 5 progress payment stages — slab, frame, lock-up, fixing and completion. You pay interest only on the drawn amount, so the loan is cheapest at the start and gets more expensive as it draws down. The two most common cash flow surprises are (1) the deposit and slab stages happening in the same 8 weeks and (2) unexpected variations pushing you 5–10% over the contract price mid-build. Plan for both.

Why a construction loan works differently from a normal home loan

A standard home loan pays out the whole loan amount at settlement, and repayments start on day one. That model doesn't work for a new build — the builder hasn't done the work yet, so releasing $600,000 up front makes no sense.

Instead, construction loans use a progress payment structure. The bank releases your loan in tranches as the build passes construction milestones, and you pay interest only on the portion drawn so far. Repayments start small and grow through the build, then convert to normal principal-and-interest repayments once the property is complete.

Australian construction loans follow a fairly standardised 5-stage draw schedule, set out in the contract between you, the builder and the lender. Here is what happens at each stage.

The 5 progress payment stages

The exact percentages vary slightly between builders and states but here is the standard Australian schedule:

Note: I've labelled 6 rows here — Stage 1 (deposit) is sometimes counted as part of Stage 2, which is why you'll see references to a "5-stage" schedule elsewhere. The mechanics are identical either way.

Each stage requires a signed progress claim from the builder, and a valuation or site inspection on the bank's side, before the funds are released. The turnaround is usually 5–10 business days from claim to payment.

When interest actually starts (and how much)

Interest on a construction loan starts at first drawdown — usually the deposit stage. But because you have only drawn 5% of the loan, your interest payment in month one is genuinely small.

Worked example on a $600,000 construction loan at 6.75%:

Once completion is reached, the loan converts to principal-and-interest, and the repayment jumps from ~$3,375 (interest only) to ~$3,890 (P&I over 30 years). Most builders promise 10–12 month builds; in practice, expect 12–16 months for a standard single-storey home in South East Queensland. Custom, two-storey, and difficult-site builds run longer.

The cash flow surprises to plan for

Surprise 1: The 8-week squeeze between deposit and slab

The deposit (5%) is due on contract signing. The slab payment (another 15%) is due 4–8 weeks later, once the concrete is poured. In those 8 weeks you might also be paying:

• Site costs the builder didn't quote for (extra rock, drainage, sewer connection variations)
• Council contribution fees at building approval
• Insurance premium (Home Warranty / builder's insurance depending on state)
• Independent inspector fees
• Your existing rent — because you're not living there yet

Total out-of-pocket in that window can be $15,000–$30,000 on top of the loan drawdowns. Plan for it, or you'll be scrambling.

Surprise 2: Variations mid-build

The contract you sign is the starting point, not the final price. Almost every build we finance in Brisbane sees variations — client changes, unforeseen site issues, or supplier substitutions — totalling 3–8% of the contract price. That's $18,000–$48,000 on a $600k build.

Some variations get funded into the construction loan if there is contingency approved. Most are funded from your own cash. If you don't have a 5–8% variation buffer sitting in cash, you'll be paying out of your everyday account or delaying stages.

Ask your builder for a written variation policy before you sign, including the mark-up they charge on variations (often 15–20%) and their timeline for quoting them.

Surprise 3: Interest during build vs your rent

Construction takes 12–16 months. During that time you're paying construction loan interest AND either rent (if renting) or an existing mortgage (if selling later, or if building on the second block).

For a Brisbane build starting at $600k contract:

• Total interest paid during the 12–14 month build phase: ~$18,000–$24,000
• Add rent or existing mortgage: another $18,000–$40,000
• Total dual-housing cost during build: often $40,000+

This is not a reason not to build — but it does mean that the "cheaper" appearance of building versus buying often narrows once you count carrying costs. Budget for it explicitly.

Surprise 4: Lock-up delays cost the most

Between frame and lock-up is where builds most commonly stall — waiting on roofing materials, windows, weather delays. Every week of delay at lock-up costs you interest on the 40%+ you've already drawn without progressing the build. A 6-week delay at lock-up on a $600k loan costs about $1,900 in "waiting interest" with no forward motion.

Some clients build a specific incentive-and-penalty clause into their contract for lock-up timing. Worth discussing with the builder up front.

Not every lender does construction well

Construction loans are more work for the lender (multiple valuations, progress claim admin, stage checks), so not every bank offers them, and among those that do, the quality varies wildly. What we look for when selecting a construction lender for a Brisbane client:

• Interest-only during build with automatic conversion at practical completion (no fresh application required)
• Reasonable stage inspection turnaround — 5–7 business days, not 2–3 weeks
• Progress payment fees waived or reasonable — some lenders charge $150 per drawdown, others $0
• Willingness to include cost of land in the total facility (so land settles at contract exchange, then rolls into the construction loan)
• Contingency capacity — some lenders will lend an extra 5–10% variation buffer within the facility so you don't need to refinance mid-build

The First Home Guarantee scheme is available on construction loans through a subset of participating lenders, but not all — worth checking early if you're an FHB using the scheme.

Practical structuring tips

1. Sign the land and build contracts as a package. Don't settle land, then start looking for a builder 6 months later — you'll be paying holding costs on the land during that gap.
2. Get the land valued for the finished property, not the vacant lot. Lenders will approve based on "on-completion valuation" — which usually shows the finished property is worth 5–15% more than land + build cost, giving you built-in equity.
3. Ask for the contract price to be broken into fixed and provisional sums. Fixed sums are locked; provisional sums are estimates that can move. The lower the provisional sum share, the more predictable your final cost.
4. Retain 5% as a cash buffer outside the loan. Even the best-planned build hits something unexpected.
5. Line up your conveyancer, builder, broker, and valuer as one team. The most stressful construction files we see are the ones where those four are meeting each other for the first time mid-build.

Frequently asked questions

Q: Do I need to pay for the land first, then get the construction loan?

For most house-and-land packages, the land settles first (using a portion of your total facility as a "land loan"), then the construction loan draws down as building progresses. If you already own the land, the construction loan can be structured as an equity-release construction facility using the land as security.

Q: What if the build goes over budget?

If variations push you above the approved facility, you have three options: fund the overrun from cash, get a top-up approval from the lender (mid-build valuation required), or refinance to a lender with more capacity. Refinancing mid-build is expensive and slow — building a variation buffer in from the start is much cheaper.

Q: Can I live somewhere else during the build and still get the First Home Guarantee?

Yes. The FHG requires you to move in within 6 months of practical completion (not construction start) and live there for at least 6 continuous months. Living in a rental while the house is built is fine. See our First Home Guarantee guide for the full rules.

Q: What happens if the builder goes into liquidation mid-build?

Every Australian state requires builders to hold Home Warranty Insurance (in QLD it's the QBCC Home Warranty Scheme). If the builder fails, this insurance covers completion up to a capped amount. The trap is that the cap is often below the true cost of finding a replacement builder mid-build. Choose a builder with genuine financial stability, not just a low quote.

Q: When does my council rates and land tax bill start?

Usually from settlement of the land (or from a set date after practical completion, depending on the council). Factor these ongoing holding costs into your budget from settlement day.

Q: Do I need building & pest inspections on a new build?

Not "building and pest" in the same sense as an existing home — but you should engage an independent inspector at three stages: pre-slab (site works), lock-up (before hidden work is covered), and pre-handover (final defect list). Costs $600–$1,200 total across the three inspections. Cheap insurance.

Q: Can I convert the construction loan to a different lender at completion?

Yes — once the property is complete and the "as-built" valuation is done, it becomes a standard property that can be refinanced to any lender. Some clients specifically choose a decent-rate construction lender for the build, then refinance to the best rate lender at completion. This is worth doing if you can find a 0.3%+ rate improvement.

Q: What's the difference between a construction loan and a knockdown-rebuild loan?

Mechanically the same — funds released in stages, interest-only during build, converts at completion. Knockdown-rebuild adds a step: demolition and site clearing before slab. Some lenders treat this as a separate facility; others fund it into stage 1.

Working out your finance structure

Every build is a slightly different finance puzzle — deposit source, land status, builder terms, contingency needs, FHB eligibility — and getting the structure right at the start saves months of stress. If you would like to run through your build finance structure with a broker who has closed 100+ construction files, book a free chat with Karann or read up on our builder partner service.

Last reviewed: 30 May 2026.

Sources used in this article:

• Master Builders Australia — Consumer guides for new home buyers
• Housing Industry Association (HIA) — Cost of building indices
• Queensland Building and Construction Commission — Home Warranty Scheme
• Moneysmart — Buying a new home or apartment