The Fees That Apply Before and During Construction
Construction finance carries different charges compared to a standard home loan. You pay an application fee at the start, which covers the lender's assessment of your project and building contract. During the build, most lenders charge a progressive drawing fee each time they release funds to your registered builder. Some lenders also apply an ongoing service fee or account-keeping charge for the duration of the construction phase.
Application Fees for Construction Finance
Application fees for construction loans typically range from $600 to $1,000. The lender reviews your council plans, your fixed price building contract, and the progress payment schedule outlined by your builder. This assessment takes longer than a standard home loan because the lender needs to verify that your project is viable and that the contract terms are clear. If you're building a custom home on a vacant block in Brunswick near Merri Creek, expect the lender to request a full set of council-approved plans and a detailed cost breakdown before approving the loan amount.
Consider a scenario where a client purchases suitable land in Brunswick West for construction of a new home. The lender charges an application fee of $850 and requires a registered valuation of the completed property, which adds another $300 to $400. The application process takes three to four weeks because the lender's construction team reviews the building contract line by line to confirm that the progress payments align with the construction draw schedule.
Progressive Drawing Fees and How They Accumulate
A progressive drawing fee applies each time the lender releases funds to your builder. The fee typically ranges from $150 to $350 per draw. Most residential builds involve five to six progress payments, which means the total cost of drawing down the loan amount can reach $1,500 to $2,000 over the course of the project. The lender only releases funds after a progress inspection confirms that the stage of work is complete. This protects you and the lender, but it also means you pay the drawing fee multiple times rather than once.
The progressive payment schedule is set out in your building contract. For a project home loan on a house and land package, the builder submits a claim when they reach each milestone, such as base stage, frame stage, lockup, fixing, and practical completion. The lender arranges an independent inspection, and if the work meets the contract requirements, they release the next instalment. The progressive drawing fee covers the cost of this inspection and the administrative work involved in processing each payment.
How Interest Accrues During the Build
Lenders only charge interest on the amount drawn down, not on the full loan amount. If your total construction funding is $600,000 and the builder has been paid $200,000 to date, you pay interest on $200,000. This is an interest-only repayment option, which keeps your monthly costs lower during the construction phase. Once the build is complete and the loan converts to a standard home loan, you begin paying principal and interest unless you negotiate otherwise.
In our experience, clients underestimate the total interest cost during construction because they calculate based on the final loan amount rather than the progressive drawdown. For a build that takes nine months, the average drawn balance might be 50% to 60% of the total loan amount, which means your interest cost is significantly lower than it would be if you borrowed the full sum upfront. At current variable rates, this structure can save several thousand dollars compared to a lump-sum loan.
Fixed Versus Variable Rates During Construction
Most lenders offer variable rates during the construction phase, even if you plan to fix the rate once the build is complete. Variable rates allow flexibility as the loan amount increases progressively, and they avoid the complexity of calculating fixed rate interest on a changing balance. Some lenders allow you to lock in a rate for the construction period, but this option usually comes with higher fees and less flexibility if the project is delayed.
If you're financing a land and construction package in Brunswick near Sydney Road, you typically commence building within a set period from the disclosure date. The lender structures the loan so that the land component settles first, and the construction funding becomes available as the build progresses. This two-stage process means you pay interest on the land loan immediately, while the construction loan only starts accruing interest once the first progress payment is drawn.
Owner Builder Finance and Additional Costs
Owner builder finance attracts higher fees and stricter conditions than standard construction loans. Lenders view owner builders as higher risk because the project lacks the oversight of a registered builder with professional indemnity insurance. You may pay an additional fee of $500 to $1,000 upfront, and the lender will usually cap your loan-to-value ratio at 70% to 80%, which means you need a larger deposit.
The lender also requires detailed cost breakdowns for each stage of the build, including payments to plumbers, electricians, and other sub-contractors. You must provide tax invoices and proof of payment before the lender releases the next draw. This administrative burden adds time and complexity, and it's one reason why construction loans for owner builders involve higher fees and more documentation than standard project home loans.
Cost Plus Contracts and Fee Implications
A cost plus contract is less common in residential construction, but it does appear in custom home finance and some renovation projects. Under this structure, you pay the builder's actual costs plus a margin, rather than a fixed price. Lenders charge higher application fees for cost plus contracts because the final loan amount is less predictable, and the lender must review invoices and receipts throughout the build to verify costs.
If you're renovating a period home in Brunswick East near Albion Street, a cost plus contract might suit a project where the scope is unclear until work begins. However, expect the lender to apply stricter conditions, including a contingency reserve of 10% to 20% built into the loan amount. The progressive drawing fee remains the same, but the lender may require more frequent inspections, which can increase the total number of draws and therefore the total fee cost.
When Valuation Fees Apply
Most lenders require two valuations for construction finance: one at application to assess the land value, and another at practical completion to confirm the finished property value. The upfront valuation costs $300 to $500, depending on the location and property type. The completion valuation is usually included in the loan terms, but some lenders charge a second fee of $200 to $400 if the build takes longer than 12 months.
For first home buyers building in Brunswick, the valuation fee is an upfront cost that needs to be accounted for alongside your deposit and stamp duty. If you're financing a house and land package, the lender uses the valuation to confirm that the land price and construction cost align with the market value of the completed home. If the valuation comes in lower than expected, the lender may reduce the loan amount or require a larger deposit to maintain the loan-to-value ratio.
How to Compare Total Fee Costs
When comparing construction finance options, add the application fee, progressive drawing fees, valuation costs, and any ongoing account fees to calculate the total cost. A lender with a lower interest rate but higher drawing fees may end up costing more over the course of the build, especially if your project involves six or more progress payments.
If you're building a new home in Brunswick and need clarity on the fee structure for your specific project, call one of our team or book an appointment at a time that works for you. We work with lenders who offer transparent fee schedules, and we can calculate the total cost based on your construction draw schedule and building contract.
Frequently Asked Questions
What is a progressive drawing fee on a construction loan?
A progressive drawing fee is charged each time the lender releases funds to your builder during construction. The fee typically ranges from $150 to $350 per draw and covers the cost of inspecting the work and processing the payment.
How many times will I pay the progressive drawing fee during a build?
Most residential builds involve five to six progress payments, which means you'll pay the drawing fee five to six times. The total cost of these fees can reach $1,500 to $2,000 over the course of the project.
Do I pay interest on the full loan amount during construction?
No, lenders only charge interest on the amount drawn down at each stage. If your total loan is $600,000 but only $200,000 has been drawn, you pay interest on $200,000 until the next progress payment is released.
Are construction loan fees higher for owner builders?
Yes, owner builder finance typically attracts an additional upfront fee of $500 to $1,000, and lenders apply stricter conditions. You'll also need to provide detailed cost breakdowns and proof of payment for each stage of the build.
Do I need to pay for two property valuations when building a new home?
Most lenders require a valuation at application to assess the land value, and another at practical completion to confirm the finished property value. The upfront valuation costs $300 to $500, and some lenders charge a second fee if the build takes longer than 12 months.
