A construction loan pays your builder in stages, so you only borrow what the build has used so far. That structure suits many Brunswick projects, but it comes with paperwork, inspections and a change in repayments once the build is finished.
This article covers the main advantages and drawbacks of construction finance, so you can decide whether it fits your build.
How Does a Construction Loan Work?
A construction loan releases money in stages as your builder completes each part of the project, rather than as one lump sum at settlement. Lenders typically pay each progress payment after a progress inspection confirms the work is done.
The stages are set out in a construction draw schedule, which usually follows the build: slab, frame, lock-up, fixing and completion. Your builder issues a claim at each stage, the lender arranges an inspection, and the funds are released. Lenders usually also want to see the building contract, council approval and plans before they approve the loan, so the construction loan application involves more paperwork than a standard home loan.
The Main Advantages of Building Project Funding
The biggest advantage is that most lenders only charge interest on the amount drawn down, so your early repayments are lower than on a fully drawn loan. Many lenders also offer interest-only repayment options during the build.
Consider a Brunswick owner planning a knockdown rebuild with a total construction loan of $500,000. The illustrative example rate here is 6.75% p.a., and the draw schedule is as follows:
- Slab stage: $75,000 drawn, so interest is about $422 a month.
- Frame stage: $175,000 drawn in total, so interest is about $984 a month.
- Lock-up stage: $325,000 drawn in total, so interest is about $1,828 a month.
- Fixing stage: $425,000 drawn in total, so interest is about $2,391 a month.
- Completion: $500,000 drawn in total, so interest is about $2,813 a month.
The owner's repayments rise gradually across the build instead of starting at the full amount on day one. That gives them time to adjust their budget, and it can ease pressure if they are paying rent elsewhere during construction. After completion, the loan usually moves to principal and interest, and the owner's repayments step up. Those figures are illustrative only and will change with your lender, rate and loan structure. You can test your own numbers with the loan repayment calculator.
What Are the Disadvantages of a Construction Loan?
The main disadvantages are more administration, stricter lender conditions and a repayment step-up once the build finishes. Costs and delays during the build can also catch owners out.
Some lenders may charge fees for progress payments or inspections, so check each lender's fee schedule. These fees add to the total cost of the loan, so it is worth asking about them before you compare lenders. A delay at any stage, such as a late inspection or a missing document, can hold up the next payment to your builder.
The interest-only period is also a trade-off. Repayments are lower while you build, but you are not paying down the principal. Once the loan converts to principal and interest, repayments are calculated over the remaining term, so they will be higher than during the build.
Fixed Price Building Contract or Cost Plus Contract?
A fixed price building contract sets the total cost up front, which makes it simpler for a lender to assess and for you to budget. A cost plus contract bills actual costs plus a margin, so the final figure can move.
Lenders generally prefer certainty, so a fixed price contract with a registered builder is often the more straightforward route to approval. The trade-off is that fixed prices may not cover variations. If you change the design or choose upgrades partway through, you may need extra funds. Many lenders do not accept cost plus contracts or apply stricter conditions to them, so confirm lender policy before choosing a contract type.
Ask your builder how variations are priced and paid. If a variation pushes you past your approved loan amount, you will need to cover the gap from your own savings or ask the lender for an increase, which is not always approved.
Why Your Brunswick Build Needs a Buffer
A contingency buffer protects you when costs rise or timing slips, and it is worth planning for before you apply. Builds can run over because of site conditions, material costs or changes to the plans.
In Brunswick, you are building in the City of Merri-bek, so council approval is part of your timeline. Your lender will want the approvals in place before funds are released. Any delay in approval pushes back the start of the build, and that can affect how long you carry rent or other housing costs alongside your loan.
Before applying, check your borrowing capacity with the borrowing power calculator. A buffer in your budget also gives you room if you need to pay for extras the contract does not cover.
How a Mortgage Broker Can Help With Construction Finance
A broker can compare construction loan options from the lenders on their panel and match them to your build, your contract type and your budget. Lenders differ on fees, drawdown rules, interest-only periods and how they handle the move to principal and interest.
The team at Blue Lion Lending can explain how your draw schedule will work and what each lender needs to see. If you are weighing up your wider options, our Brunswick home loans page explains how we approach local lending. The trade-off is that a broker's recommendation still depends on your circumstances, so you should read the loan terms and ask about any fees before you sign.
If you are ready to talk through your build, call one of our team or book an appointment at a time that works for you. You can also read more on our construction loans page or visit our Brunswick mortgage broker page.
Frequently Asked Questions
How do progress payments work on a construction loan?
The lender releases funds in stages as your builder completes each part of the build. A progress inspection usually confirms the work before each payment is made.
Do I pay interest on the full construction loan amount straight away?
Most lenders only charge interest on the amount drawn down, so repayments rise as the build progresses. Check your lender's terms, as fees and conditions differ.
What are the downsides of a construction loan?
There is more paperwork, some lenders may charge fees for progress payments or inspections, and repayments increase when the loan moves to principal and interest. Delays or variations can also create extra costs.
Is a fixed price contract or a cost plus contract easier to finance?
Lenders generally find a fixed price contract with a registered builder more straightforward to assess. Many lenders do not accept cost plus contracts or apply stricter conditions, so confirm lender policy before choosing a contract type.
