Proven Tips to Manage Construction Loan Settlement

Settlement in a Construction Loan Works Differently

Construction loan settlement doesn't happen in one transaction. Instead, funds are released progressively as your build reaches specific milestones, and each drawdown is treated as a partial settlement event where the bank releases money directly to your builder.

In a scenario where a general dentist is building a custom home, they might secure approval for a construction loan of $850,000. The lender releases nothing on day one. Instead, the first payment happens when the slab is poured, the second when the frame is up, the third when the roof is on, and so on through five or six stages. Each release requires an inspection by the lender's valuer, and each stage brings the loan balance closer to the approved amount. You only pay interest on what's been drawn down, not the full loan amount.

This structure means you're coordinating with your builder, your lender, and often your conveyancer or solicitor at every stage. Timing matters because builders expect payment shortly after completing each milestone, and delays can stall the project or damage your working relationship with the contractor.

How the Progressive Drawdown Schedule is Set

Your progress payment schedule is defined by your building contract and must align with the lender's drawdown structure. Most lenders work with a five or six stage schedule, releasing funds at slab, frame, lockup, fixing, and practical completion.

A typical schedule releases around 10% at base stage, 15% at frame, 25% at lockup, 25% at fixing, 20% at practical completion, and the final 5% after the final inspection. Your builder's contract might use slightly different percentages or stage descriptions, and the lender will usually accept reasonable variations as long as the stages are clear and the amounts are proportionate to the work completed.

If you're working under a cost plus contract, the schedule becomes more flexible but also more complex. The builder submits invoices for materials and labour as the project progresses, and you request drawdowns to cover those costs. This can mean more frequent drawdowns and closer scrutiny from the lender, since there's no fixed price to anchor the valuation.

What Happens at Each Drawdown

When your builder notifies you that a stage is complete, you contact your lender to request a drawdown. The lender arranges a progress inspection, usually within a few business days, and a valuer attends the site to confirm the work matches the stage description and that the amount being claimed is reasonable.

Once the inspection is approved, the lender releases the funds. Some lenders pay the builder directly, others pay into your account and you transfer it to the builder. Either way, the lender records that portion of the loan as drawn down, and your interest charges increase accordingly. If you've chosen interest-only repayment options, you'll only pay interest on the drawn amount, not principal, until the build is finished and the loan converts to principal and interest.

Each drawdown also attracts a Progressive Drawing Fee, typically between $200 and $400 per inspection. Over five or six stages, that adds $1,000 to $2,400 to your build costs. Some lenders waive this fee as part of a package deal, especially if you're using a professional package tailored for dentists.

What If the Valuation Comes in Under the Builder's Claim

The valuer might assess the completed work as worth less than the builder is claiming for that stage. This happens more often with cost plus contracts or when a builder front-loads the payment schedule.

Consider a scenario where the builder claims $120,000 for the frame stage, but the valuer assesses the work as worth $105,000. The lender will only release $105,000, leaving a $15,000 shortfall. You'll need to cover that gap from your own funds or negotiate with the builder to adjust the schedule. If the builder insists on the full amount and you can't cover the difference, the project can stall.

To reduce this risk, make sure your building contract uses a schedule that matches industry norms and that your builder is a registered builder with a solid reputation. Lenders are more comfortable with fixed price building contracts because the valuation risk is lower, and the payment schedule is transparent from the start.

Timing Between Stages and Interest Costs

You start paying interest as soon as the first drawdown is made, even though the house isn't finished. If your build takes eight months and the first drawdown happens in month one, you'll be paying interest on at least part of the loan for the entire build period.

A general dentist building a home while living in a rental might be paying both rent and construction loan interest for most of the build. If $200,000 has been drawn down at an interest rate of 6.5%, that's roughly $1,080 per month in interest. By the time the build reaches lockup and $500,000 is drawn, the monthly interest cost climbs to $2,700. Those payments continue until you move in and can redirect your income toward the full loan repayment.

Some lenders let you capitalise the interest during construction, meaning the interest charges are added to the loan balance rather than paid out of pocket. This keeps your cash flow intact during the build but increases the final loan amount and the interest you'll pay over the life of the loan.

Converting from Construction to Permanent Loan

Once the build is complete and you've received council approval for occupancy, the loan converts from construction to a standard home loan. This is sometimes called a construction to permanent loan, and most lenders structure it so the conversion happens automatically.

At conversion, the full loan amount is drawn down, and your repayments switch from interest-only on the drawn portion to principal and interest on the full balance. Your interest rate might also change if you were on a discounted construction rate or if you're moving from variable to fixed. The lender will send you a new loan schedule showing your ongoing repayments, and you'll start making regular monthly payments like any other home loan.

If you've used a construction loan through a broker who specialises in working with dentists, they'll usually coordinate the conversion process and make sure the transition is handled without surprises.

What to Have Ready Before Each Drawdown

You'll need documentation at each stage to support the drawdown request. The builder provides a stage completion certificate or invoice, and you submit that to the lender along with your drawdown request. The lender arranges the inspection, and once approved, processes the payment.

If the builder has engaged sub-contractors and you're responsible for paying them directly under the contract, you'll need invoices from the plumbers, electricians, and other trades before the lender will release funds. This is more common with owner builder finance, where you're acting as the builder and coordinating all the trades yourself. It adds administrative work but can reduce costs if you have the time and experience to manage it.

For a general dentist working full-time in a practice, taking on an owner builder role is rarely practical. Most opt for a registered builder under a fixed price contract, which shifts the coordination burden to the builder and simplifies the drawdown process.

Managing Cash Flow During the Build

Your deposit is usually paid at the start, before the first drawdown. If you're buying land and building, the land purchase settles first, and the construction loan is set up as a separate facility or a second tranche of the same loan. You'll need enough cash to cover the land deposit, the land settlement costs, and any gap between what the builder claims and what the lender releases at each stage.

If you're building on land you already own, the lender will use the land value as part of your security, which can reduce the loan-to-value ratio and improve your borrowing position. A general dentist who bought a block in an established suburb a few years ago and is now ready to build will often have enough equity in the land to avoid paying lenders mortgage insurance on the construction loan, even if the total loan amount is high.

Keep a buffer of at least $10,000 to $20,000 in accessible savings during the build to cover unexpected costs, valuation shortfalls, or delays. Construction projects often run over budget, and having cash on hand means you can keep the project moving without scrambling for funds.

Your builder, lender, and the project timeline all need to stay aligned for a construction loan to settle smoothly at each stage. If you're uncertain about how the process will unfold for your specific build, call one of our team or book an appointment at a time that works for you.

Frequently Asked Questions