Building your own home is one of the most exciting things you can do but it also comes with some genuinely confusing financial mechanics. One question we hear constantly from clients at Central Lending Solutions is: “Do I have to start making full mortgage repayments while the house is still being built?”
The short answer is no and understanding exactly how payments work during construction can save you a lot of stress and help you budget far more accurately. Here’s a clear breakdown of what to expect.
How a Construction Loan Works Differently
A standard home loan is simple: the bank hands over a lump sum, and you start repaying principal and interest. A residential construction loan works very differently. Instead of releasing the full amount upfront, your lender releases the funds in stages called progress payments or drawdowns that align with completed stages of your build.
This staged approach means you’re only borrowing (and being charged interest on) what has actually been spent so far, not the full loan amount. It’s a practical and often cost-effective way to finance a new build, but it does require careful planning.
The Stage Payment Schedule
Most builders in Western Australia work to a standard five-stage payment schedule. Each stage represents a milestone in the construction process, and your lender releases funds to the builder once that milestone is verified. The typical stages look something like this:
Stage 1: Slab / Base The foundation is laid and the slab is poured. Your lender releases the first drawdown (often around 10, 15% of the build cost) at this point.
Stage 2: Frame The structural frame of the house is erected. Another drawdown is released, typically around 20% of the build cost.
Stage 3: Lockup The roof, external walls, windows, and doors are completed the house can now be “locked up.” This is often the largest single drawdown stage.
Stage 4: Fixing Internal plastering, cornices, doors, cabinetry, and fittings are installed. Another payment is released.
Stage 5: Practical Completion The house is finished and ready for handover. The final drawdown is released, which also typically includes any retention amount.
The exact percentages can vary between builders and lenders, so it’s worth reviewing your building contract carefully and discussing the schedule with your broker before signing anything.
Interest-Only Repayments During Construction
Here’s the part that catches most people off guard: during the construction period, you only pay interest on the amount drawn down so far, not on the total approved loan amount.
This means at the very beginning of your build say, just after the slab is poured and only the first drawdown has been released your repayments are quite small. They grow progressively as more of the loan is drawn down through each stage.
You can use our interest-only mortgage calculator to get an idea of what these repayments might look like at different stages of the draw-down process.
This interest-only period usually lasts for the duration of construction, which is typically 6 to 12 months depending on the builder, the complexity of the project, and any delays. Once construction is complete and the final drawdown is made, the loan converts to a standard principal and interest loan and your full repayments begin.
What About the Land Loan?
If you purchased a vacant block of land separately and took out a loan to do so, you’ll generally be making repayments on that land loan while the house is being built. These are separate to the construction loan interest payments and need to be factored into your monthly budget.
Some lenders allow you to consolidate the land loan and the construction loan into a single facility, which can simplify things considerably. This is worth discussing with your mortgage broker early in the process ideally before you sign anything.
How Progress Inspections Work
Before releasing each drawdown, most lenders will require a progress inspection either by their own valuer or through a building certifier to confirm that the relevant stage of construction has been genuinely completed. You generally cannot request a drawdown simply because a certain date has passed; the physical work needs to be done first.
This verification step is actually a form of protection for you as the borrower. It ensures you’re not handing over large sums to a builder before the work has been completed to the required standard.
Managing Your Cash Flow During the Build
Even though your repayments start small and grow gradually, you still need to think carefully about your overall cash flow during construction. Consider:
Rent or living costs. If you’re renting while your new home is being built, you’re paying both rent and construction loan interest simultaneously. Use our budget planner to map out your monthly expenses during this period and make sure you can comfortably cover both.
Variations and extras. Construction costs have a habit of creeping upward. Variations to the original building contract are things you decide to add or change mid-build usually need to be paid for separately and are not covered by your original loan amount unless you’ve arranged for a contingency buffer.
Delays. If the build takes longer than expected (and many do), your interest-only period extends, which means you’re paying construction interest for longer while potentially also still paying rent. Factor in a buffer when planning.
Council and connection fees. Water, power, and other utility connections often involve upfront costs that aren’t included in your builder’s contract. These can add up quickly.
Fixed Rate or Variable? Does It Matter During Construction?
Most construction loans are set up at a variable interest rate during the build phase, then switch to whatever rate structure you’ve arranged once the loan converts at completion. If you’re keen to lock in a fixed rate for certainty once you move in, speak to your broker about your options. Some lenders allow you to lock in a fixed rate loan ahead of time, while others require the loan to be converted before fixing.
What If You’re Also Selling Your Existing Home?
If you currently own a property and you’re building your next home, the timing between selling and the build completing can get complicated. If the build takes 12 months but your current home sells in month three, you’ll need somewhere to live in the interim and you may find yourself paying rent, construction loan interest, and potentially bridging costs all at once.
Bridging finance can help in some of these situations, allowing you to hold both loans at once for a defined period. It’s not right for everyone, but it’s worth understanding what’s available. Our borrowing power calculator can also help you assess how much flexibility you have in your overall position.
After Construction: The Loan Converts
Once your builder hands over the keys and the final drawdown has been paid, your construction loan typically converts automatically to a standard home loan. At this point, your lender will set up principal and interest repayments based on the total amount drawn down.
This is a good moment to review your loan structure. Is the interest rate still competitive? Are the features right for your situation now that you’re in the home? If you’re not sure, a home loan refinance review might be worthwhile. Sometimes the loan that worked during construction isn’t the best long-term fit.
FAQs
Can I make extra repayments during the construction period?
This depends on your lender. During the interest-only phase, most lenders don’t allow you to make principal repayments on the construction component, though some will permit it. Once the loan converts at completion, extra repayments are usually available depending on your loan type.
What happens if my builder goes bankrupt mid-construction?
This is a stressful but real scenario. Your lender may engage a valuer to assess where the build is up to, and the funds held back (not yet drawn) remain in your loan facility. You would then need to engage a new builder to complete the work. Domestic building insurance (required in WA) provides some protection in this situation.
Do I need a separate bank account for the construction loan?
Not usually the lender manages drawdowns directly to the builder. However, having an offset account linked to your construction loan (if your lender offers one) can help reduce interest costs during the build. Use our home loan offset calculator to see how much you could save.
Can I choose the timing of each drawdown?
Generally no drawdowns are triggered by the completion of each construction stage as verified by a progress inspection. You can’t request an early drawdown simply because you need the funds sooner.
Is a construction loan harder to get approved than a regular home loan?
The assessment process is broadly similar, though lenders will also look at your building contract, the builder’s credentials, and the projected end value of the completed property. Working with a mortgage broker who has experience with construction finance can make the process considerably smoother.
Ready to Talk About Building Your Home?
Understanding how construction loan payments work is just one piece of the puzzle. The right loan structure, lender, and preparation can make an enormous difference to how smoothly your build goes financially and otherwise.
At Central Lending Solutions, we’ve helped Perth clients finance new builds across a wide range of situations. We work with multiple lenders, so we can compare options and help you find a construction loan that suits your build timeline and budget. And because we’re paid by the bank, our service costs you nothing.
Book a free appointment with our team today whether you’re just starting to research or you’re ready to get your finances sorted, we’re here to help.
0489 082 257 | info@centrallendingsolutions.com.au
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Contact our team if you have questions about home loans, refinancing, or other lending options. Call us, book a time to speak, or send us an email and we will get back to you.
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info@centrallendingsolutions.com.au
Central Lending Solutions is a Perth-based mortgage brokerage with over 20 years of experience in the finance industry. Our team helps clients compare lenders and navigate the home loan process from enquiry through to approval.
