How progress payments work
You pay the builder for each stage once it is complete, and the lender releases the money from your loan. In Victoria the Domestic Building Contracts Act sets the deposit cap and the usual stage percentages; Consumer Affairs Victoria warns that home warranty insurance may not cover work you pay for before it is finished.
| Stage | Complete when | Payment (% of the contract price) |
|---|---|---|
| Deposit | Contract signed (don't pay it until the builder gives you a certificate of currency for your property) | Up to 5% (10% for contracts under $20,000) |
| Base | Footings poured and base brickwork to floor level, or the slab or stumps complete, depending on the floor | 10% |
| Frame | Frame complete and approved by a building surveyor | 15% |
| Lock-up | External cladding and roof fixed, flooring laid, external doors and windows fixed | 35% |
| Fixing | Internal cladding, architraves, skirting, doors, shelves, baths, basins, sinks and cabinets fitted | 25% |
| Completion | The work is finished | The balance: 10% after a 5% deposit |
Interest during the build
Interest is charged only on the balance drawn, so repayments start small and grow with each stage. If you are buying land, it is usually paid for at settlement, before building starts, so you pay interest on it for the whole build.
| Stage | Month | Drawn from the loan | Loan balance | Interest-only repayment a month |
|---|---|---|---|---|
| Land settlement | 0 | $140,000 | $140,000 | $728 |
| Deposit | 0 | $25,000 | $165,000 | $858 |
| Base | 2 | $50,000 | $215,000 | $1,118 |
| Frame | 4 | $75,000 | $290,000 | $1,508 |
| Lock-up | 6 | $175,000 | $465,000 | $2,418 |
| Fixing | 8 | $125,000 | $590,000 | $3,068 |
| Completion | 10 | $50,000 | $640,000 | $3,328 |
Once the home is complete the loan becomes an ordinary principal and interest loan. Check the full repayment with the mortgage repayment calculator and how it holds up at higher rates with the stress test calculator. Our guide to construction loans covers how to apply and which lenders we review offer them.
Construction loan questions
How is interest calculated on a construction loan?
On the amount drawn so far, not the full loan. As each stage is paid the balance rises, so interest-only repayments grow through the build. In our example they rise from $728 to $3,328 a month, about $17,940 over a 10-month build.
What are the progress payment stages?
In Victoria, a contract to build all stages usually pays a deposit of up to 5%, then 10% at base, 15% at frame, 35% at lock-up and 25% at fixing, with the balance at completion. Other states have their own rules, so check your contract and your state's building regulator.
What happens if the build takes longer?
You keep paying interest-only on the drawn balance for longer. Stretching our example from 10 to 18 months raises the interest during the build from about $17,940 to $32,344.
Is a construction loan or a normal home loan better?
They do different jobs. A normal home loan pays for a finished home in one go; a construction loan pays a builder in stages, so you only borrow and pay interest as the work is done. Most lenders convert a construction loan to an ordinary principal and interest loan once the home is complete.
