Managing a construction loan well comes down to understanding how and when your lender releases money to your builder. Each release is tied to a build stage, and interest is charged only on what has been paid out so far. If you are planning to build your dream home in Chelsea, knowing this rhythm helps you plan your cash flow with confidence.
How Does a Construction Loan Draw Schedule Work?
A construction draw schedule is the set of stages at which your lender pays your builder during the build. Instead of receiving the full loan amount upfront, the lender releases money in instalments as each stage is completed.
The stages are set out in your building contract. They typically follow the build in order, such as slab, frame, lock-up, fixing and completion. Your builder issues an invoice when a stage is finished, and the lender usually arranges a progress inspection before paying. Lenders differ in how they run inspections and how long payment takes, so ask about this early.
This is why a construction loan differs from a standard home loan. Your repayments start small and grow as more funds are drawn.
Why Interest Only Applies to the Amount Drawn
During construction, most lenders charge interest only on the amount you have drawn down, not on the full approved loan. Many lenders offer interest-only repayments for the build period, after which the loan usually moves to principal and interest.
The trade-off is that your repayments rise with each stage, and interest-only repayments do not reduce what you owe. Some lenders also charge a progressive drawing fee for each payment, so check this before you commit.
As an illustrative example only, using a rate of 6.75% p.a., a drawn balance of $200,000 would cost about $1,125 a month in interest ($200,000 x 6.75% / 12). At a drawn balance of $500,000, interest would be about $2,813 a month. Your actual rate depends on your lender and your deposit size. A broker can run the numbers on your own plan, and you can also use a repayment calculator to test different stages.
What Should You Know About Fixed Price and Cost Plus Contracts?
A fixed price building contract sets the total cost up front, while a cost plus contract charges you the actual building costs plus a builder margin. Fixed price contracts give more certainty for lending, while cost plus contracts can be harder to budget for.
Lenders generally prefer certainty, so a fixed price contract with a registered builder is often the smoother path through approval. Even so, fixed price contracts can allow for variations, and extra work you request can add to the cost. Plan for a buffer so that additional payments do not catch you short.
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Do You Need Council Approval Before Applying?
You will usually need your plans and the relevant approvals in place before a lender releases construction funds. In Victoria, that generally means council plans, a planning permit where one is required, and a building permit. Check with Kingston City Council or a registered building surveyor about what applies to your block.
Your construction loan application will usually include the signed building contract, the approved plans and details of your builder. Many lenders also expect you to commence building within a set period from the date of the loan documents, so timing your approvals matters. If your approvals are delayed, speak to your broker before the loan terms start to run out.
Example: Managing a Build From Slab to Handover
Consider a couple who own a block in Chelsea and sign a fixed price contract with a registered builder. They want to keep their rent and loan costs manageable during the build.
Their broker sets up a loan with interest-only repayments for the build period and a progress payment schedule matching the contract. At the slab stage, only the first payment is drawn, so their interest bill is small. At frame stage, the next payment lifts the drawn balance and repayments rise a little. Before each payment, they check the builder's invoice against the stage completed and confirm the progress inspection has been booked.
Because they knew the schedule in advance, they set aside extra funds for the stage when interest rises most, and kept a buffer for a small variation. At handover, the loan reached its full drawn amount and moved to principal and interest as planned. The outcome was a build with no surprise bills and no delay in paying the builder.
Can You Switch From a Construction Loan to a Permanent Loan?
Yes. Once your build is finished and your final payment is made, a construction loan usually converts to a standard home loan, and some lenders do this automatically.
When the loan converts, your repayments move to principal and interest, and the rate may change depending on the lender. It is a good time to review your options, including a refinance if another lender offers terms that suit you better. Refinancing can involve fees, so compare the full cost first.
How Does a Broker Help With Construction Loan Management?
A broker can compare construction loan options from a panel of lenders and line up the loan structure with your building contract. This matters because lenders differ on fees, inspection timing and how they treat the drawdown stages.
A broker can also assess your borrowing capacity before you sign with a builder, so the contract matches what a lender will approve. If you are in the area, our Chelsea mortgage broker team can walk you through the process. A broker's advice depends on your circumstances, and you should always read the loan terms yourself.
Call one of our team or book an appointment at a time that works for you, and we will help you plan each stage of your build with confidence.
Frequently Asked Questions
How does a construction loan draw schedule work?
A draw schedule sets the build stages at which your lender pays your builder. Money is released in instalments as each stage is completed, often after a progress inspection.
Do you pay interest on the full construction loan amount?
Usually you pay interest only on the amount drawn down so far. Repayments rise as more stages are paid, and some lenders charge a progressive drawing fee.
What happens when the build is finished?
The loan typically converts to a standard home loan with principal and interest repayments. It is a good time to review your lender and loan terms.
Should I choose a fixed price or cost plus contract?
A fixed price contract gives more certainty on cost and is often easier for lenders to assess. A cost plus contract can be harder to budget for, so a buffer is important.
