Construction Loan Structures & What You're Paying For

Construction finance works differently from standard home lending because you're paying for something that doesn't exist yet.

Instead of receiving the full loan amount upfront, you'll draw funds progressively as your builder completes stages of work. The structure you choose determines when money flows, what you'll pay in fees, and how much flexibility you have if timelines shift. For anyone building in Templestowe, where blocks range from established subdivisions near Ruffey Lake Park to larger sites in the hills toward Warrandyte, understanding these structures before you sign a building contract can save you thousands and prevent delays.

Progressive Drawdown: How the Funding Actually Works

A progressive drawdown releases loan funds in instalments as each stage of construction is completed and inspected. You only pay interest on the amount drawn down at any given time, not the full loan amount.

Consider someone building a custom home on a 700-square-metre block near Anderson Creek with a total project value of $850,000. After the initial land settlement of $450,000, they have a building contract for $400,000. The lender structures this across five stages: base and frame (20%), lockup (20%), fixing (35%), practical completion (20%), and final completion (5%). After the base and frame stage is verified by the lender's inspector, they draw down $80,000. They're now paying interest on $530,000 (land plus first draw), not the full $850,000. When lockup is reached three months later, another $80,000 is released, and interest adjusts accordingly.

Lenders charge what's called a Progressive Drawing Fee for each inspection and release, typically between $250 and $500 per stage. Across five draws, that's $1,250 to $2,500 in fees you won't see on a standard mortgage. These aren't negotiable in most cases, but knowing they exist helps you budget accurately.

Three Main Structures: Fixed Price, Cost Plus, and Owner Builder

Fixed price building contracts are the most common structure for construction loans and the one most lenders prefer. Your builder provides a contract with a set price for the entire build, and your lender structures drawdowns around a predetermined progress payment schedule. The builder manages all sub-contractors, and you deal with one entity.

Cost plus contracts give you more control but require a different lending approach. Instead of a single fixed sum, you're funding actual costs as they occur, plus a builder's margin (typically 10-15%). Lenders treat this as higher risk because the final loan amount isn't locked in. You'll need detailed cost breakdowns, quotes from plumbers and electricians, and council plans before approval. The benefit is transparency, you see exactly where money goes. The challenge is that lenders often apply stricter conditions, require larger deposits, or limit which builders they'll accept.

Owner builder finance is the most restrictive. You're acting as your own project manager, hiring sub-contractors directly and overseeing the build. Most major lenders won't touch this structure. Those that do typically cap the loan amount at 60-70% of the project value, meaning you need substantial cash or equity. You'll also need to demonstrate building experience or engage a qualified supervisor.

Construction to Permanent Loans: One Approval, Two Phases

A construction to permanent loan transitions automatically from the build phase to a standard mortgage once construction is complete. You submit one construction loan application, and the product converts without reapplying.

During construction, you make interest-only repayment options on drawn amounts. Once your Occupancy Certificate is issued and the build is complete, the loan converts to principal and interest repayments based on the full amount. This removes the risk of requalifying later, which matters if your income changes during the build or lending criteria tighten.

In a scenario where someone in Templestowe Lower is building a dual-storey home while their development application and council approval are still being finalised, they can lock in loan terms before rates shift. If construction takes nine months and their builder experiences delays due to material shortages, they're not reapplying in a different rate environment. The terms agreed at the start carry through.

Most lenders require you to commence building within a set period from the Disclosure Date, typically six to twelve months. If your registered builder can't start on time due to permit delays or you haven't secured suitable land, the approval can lapse. Once building starts, lenders usually allow 12-18 months for completion before requiring an extension.

What Happens If the Build Runs Over or Under Budget

If your fixed price building contract comes in under budget because you made changes or removed inclusions, the lender only releases what's needed. Surplus funds either reduce your loan amount or, if you've used equity from another property, return to you after final completion.

If costs increase due to variations you've requested, upgrades, or unforeseen site issues like poor soil conditions common in parts of Templestowe near the Yarra floodplain, you'll need to cover those additional payments from your own funds unless you arranged a contingency buffer in your original loan amount. Lenders don't typically increase approvals mid-build without a full reassessment, and that process can take weeks.

This is where understanding your actual project costs before lodging your application matters. For anyone looking at house & land packages or land and construction packages where pricing is clearer upfront, the risk is lower. For custom design builds on sloping blocks or sites requiring retaining walls, building a buffer into your borrowing from the start avoids scrambling for cash halfway through.

Comparing Interest Costs Across Different Build Timelines

Because you only pay interest on drawn amounts, longer builds don't necessarily cost more in interest than shorter ones, it depends on how quickly funds are released.

A six-month build with three large draws front-loaded will incur more interest than a nine-month build with gradual, evenly spaced releases. This isn't something you control directly, it's determined by your builder's progress payment finance schedule, but it's worth understanding when comparing quotes. A builder offering a faster timeline but requiring 50% upfront at slab stage will cost you more in interest during construction than one spreading payments across six stages.

At current variable rates, someone drawing $400,000 progressively over nine months might pay around $12,000 to $15,000 in interest during the build phase, compared to roughly $20,000 if they'd taken the full amount upfront as a lump sum. The exact figure depends on how draws are timed, but the principle holds: staged funding reduces your interest burden.

Why Your Build Type Changes Which Lenders Will Approve You

Not all lenders fund all build types. A project home loan through a volume builder with a fixed price contract and standardised plans will have dozens of lender options. A custom home finance scenario on a bushfire-prone site using an architect and a small boutique builder might have five.

Spec home finance, where you're building to sell rather than occupy, is treated as investment lending with different serviceability tests and often higher rates. Off the plan finance for apartments isn't construction lending at all, it's deferred settlement, and operates under completely different rules. These distinctions matter when you're planning what to build and where.

For anyone considering a knock-down rebuild in established Templestowe streets near Macedon Plaza, most mainstream lenders will participate. If you're looking at a house renovation loan that includes a second-storey addition requiring significant structural work, expect lenders to treat it similarly to new construction, requiring detailed plans, a registered builder, and progress inspections.

If you're planning a build in Templestowe or exploring whether your project aligns with what lenders will fund, call one of our team or book an appointment at a time that works for you. We access construction loan options from banks and lenders across Australia and can match your specific build type and location to the structures and lenders that make sense for what you're trying to achieve.

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