Construction Loan Structures & What Not to Assume

How Construction Loan Structures Differ from Standard Home Loans

Construction loans release funds progressively as your build reaches set stages, not as a lump sum at settlement. You only pay interest on the amount drawn down at each stage, which keeps your initial repayments lower while the project is underway. Once construction completes, the loan converts to a standard home loan with principal and interest repayments.

This structure works because lenders reduce their risk by inspecting each stage before releasing the next payment. Your registered builder submits a progress claim, the lender arranges a progress inspection, and funds are released directly to the builder once the work is verified. The process repeats at foundations, frame stage, lock-up, fixing stage, and practical completion.

For RAAF Base Richmond members, this matters when building in areas like North Richmond or Clarendon where land is available but few established homes are on the market. A construction to permanent loan lets you secure suitable land now and build within a set period from the disclosure date, typically 12 to 18 months depending on the lender.

Fixed Price Contracts vs Cost Plus Contracts

A fixed price building contract locks in the total build cost before construction starts. The builder quotes a final figure, you agree to it, and that amount becomes the basis for your loan approval. Lenders prefer fixed price contracts because the loan amount is known from the outset and the builder carries the risk of cost overruns.

A cost plus contract works differently. The builder charges their actual costs plus a margin, usually 10 to 15 percent. You might see this with custom design projects or owner builder finance arrangements. Most lenders either refuse cost plus contracts or apply stricter conditions, such as requiring a larger contingency buffer in the loan amount.

In our experience, Defence members building near Richmond often start with a project home on a fixed price contract. The certainty suits those who may deploy mid-build or need to manage the process remotely. One scenario involved a member building in Kurrajong Heights who secured a land and construction package with a fixed price contract at $580,000 for land and build combined. The builder provided a detailed progress payment schedule upfront, the lender approved the full amount, and drawdowns occurred without variation. The member deployed for three months during the frame stage, and the build continued without requiring their direct involvement because the contract and payment structure were already locked in.

Progressive Drawdown and the Construction Draw Schedule

The construction draw schedule sets out when funds are released during the build. Most lenders use a five-stage schedule: deposit or base stage, slab or frame, lock-up, fixing, and practical completion. Each stage represents roughly 20 percent of the build cost, though some lenders weight the final stages more heavily.

You pay interest only on the amount drawn down, not the full loan amount. If your total loan is $500,000 and $100,000 has been released for the slab, you only pay interest on that $100,000 until the next drawdown. Interest-only repayment options are standard during construction, which keeps your outgoings lower while you may still be renting or paying off another property.

Lenders also charge a progressive drawing fee each time funds are released, typically $300 to $400 per drawdown. Over five stages, that adds $1,500 to $2,000 to your total costs. Some lenders cap the fee or waive it for Defence members under specific loan products, which is worth confirming during your construction loan application.

Council Approval and the Development Application Timeline

Your lender will require council approval and stamped plans before they release any construction funds. The development application process in Hawkesbury Council, which covers the Richmond area, typically takes 60 to 90 days depending on the complexity of the build and whether the design meets local planning controls.

Once council approval is granted, you have a set period to commence building, usually 12 months from the disclosure date specified in your loan documents. If construction has not started within that window, some lenders will reassess your financial position or require an updated valuation, which can delay drawdowns.

ADF members posted to Richmond often face tight timelines, particularly if they are moving from another state and need the build completed before their posting begins. One approach is to finalise council plans and secure approval before formally applying for construction finance. That way, the loan can settle quickly and the first drawdown can occur within weeks rather than months.

What Happens When the Builder Requests a Progress Payment

The builder submits a progress claim when each stage is complete. That claim goes to the lender, who arranges a progress inspection within a few business days. An independent inspector attends the site, verifies the work matches the claim, and reports back to the lender. If everything checks out, funds are released directly to the builder's account.

You do not make the payment yourself. The lender pays the builder, and your loan balance increases by that amount. Your interest charges adjust from the day the drawdown occurs, not from the day the builder submits the claim.

If the inspection identifies incomplete work or defects, the lender will hold the payment until the issue is rectified. This protects you from paying for work that has not been finished to the required standard. In a scenario where a member building in Hobartville had their lock-up claim held because the roof had not been fully secured, the builder returned within a week, completed the work, and the funds were released after a follow-up inspection. The delay added seven days to the build timeline but ensured the payment matched the actual progress.

Interest Rate Options During Construction and After Conversion

During construction, your interest rate is typically variable. Some lenders offer a fixed rate during the build, but this is less common and may come with higher fees. Once the build completes and the loan converts to a standard home loan, you can choose between variable, fixed, or split rate options depending on your circumstances.

The construction loan interest rate is often slightly higher than a standard variable rate, usually by 0.10 to 0.30 percent, because the lender is managing progressive drawdowns and inspections. Once conversion occurs, your rate should revert to the lender's standard home loan rate, assuming you meet their criteria.

Defence members may also access no LMI loans or reduced interest rates through specialist lenders, which can apply to both the construction phase and the ongoing loan. Confirming this before you apply ensures you are not locked into a higher rate for the duration of the build.

Land and Construction Packages vs Buying Land Separately

A land and construction package bundles the land purchase and build into a single contract with a developer or builder. The pricing is usually fixed, the timelines are set, and the lender treats it as one transaction. This structure suits members who want certainty and do not have time to manage separate land purchases and builder negotiations.

Buying land separately and engaging your own builder gives you more control over design and materials, but it requires two separate contracts and a longer approval process. The lender will need to value the land, approve the builder, and assess the construction cost independently. For those building a custom design or on a rural block near Richmond, this approach makes sense. For those wanting a project home in an estate, a house and land package is usually faster.

One consideration for Richmond-based members is land availability. Blocks in new estates like The Avenues at Clarendon or North Richmond developments are often sold as part of a package with a preferred builder. If you buy land independently, you may have more choice over the builder, but you will also need to manage the coordination yourself.

When Owner Builder Finance is an Option and When It Is Not

Owner builder finance allows you to act as the head contractor and pay sub-contractors directly. You still receive progressive drawdowns, but instead of paying a registered builder, you pay plumbers, electricians, and other trades as each stage completes. Lenders treat this as higher risk, so approval is harder and usually requires prior building experience or a demonstrated ability to manage the project.

Most lenders will not approve owner builder finance for ADF members who are likely to deploy or relocate during the build. If you cannot be on-site regularly to manage trades and inspections, the risk of delays or cost blowouts increases. A handful of specialist lenders will consider it if you have a project manager in place or can prove you have built before, but the loan amount is typically capped at 80 percent of the combined land and construction value.

For those near Richmond, construction loans with a registered builder remain the most reliable option unless you have genuine building experience and can commit to being present throughout the project.

If you are planning to build near Richmond or need to understand how progressive drawdowns will affect your repayments during construction, call one of our team or book an appointment at a time that works for you.

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