Top tips to understand Construction Loan Settlement

Understanding Construction Loan Settlement

Construction loan settlement differs significantly from traditional home loan settlements. Rather than receiving the full loan amount upfront, construction loans operate through a progressive drawdown system where funds are released in instalments as your building project reaches specific construction milestones.

When applying for a loan through Pollux Financial, we can access Construction Loan options from banks and lenders across Australia to find the most suitable arrangement for your new build or major home renovations. Our streamlined application process helps match you with lenders who understand the unique requirements of construction financing.

How Progressive Drawdowns Work

The progressive drawdown system protects both you and your lender by ensuring funds are only released when work has been completed to agreed standards. Here's how the process typically works:

1. Initial deposit - Usually 5-10% of the total loan amount
2. Foundation stage - Released after concrete slab completion
3. Frame stage - Funds available once structural framework is complete
4. Lock-up stage - Payment after roof, windows, and external doors are installed
5. Fixing stage - Released when internal fit-out begins
6. Completion - Final payment upon practical completion

Lenders only charge interest on the amount drawn down, not the full loan amount. This means you'll have lower repayments during construction compared to a traditional mortgage. Many lenders also offer interest-only repayment options during the construction phase.

The Progressive Payment Schedule

Your lender will require a Progressive Payment Schedule before approving your construction loan. This document outlines exactly when funds will be released and correlates with your building contract milestones. Your registered builder will need to provide detailed cost breakdowns for each stage, including payments to sub-contractors such as plumbers and electricians.

Most lenders require an 'as if complete' valuation before loan approval. This valuation estimates your property's value once construction is finished, helping determine the maximum loan amount available.

Documentation Requirements

Successful construction loan settlement requires comprehensive documentation. Essential items include:

• Council plans and permits - All approvals must be finalised before drawdowns begin
• Building contract - Fixed price contracts are preferred by most lenders
• Insurance certificates - Both building insurance and public liability coverage
• Contractor licenses - Your registered builder must hold current licenses
• Development application - Required for new builds or significant renovations

For house & land packages or buying off the plan arrangements, additional documentation may be required depending on the developer and project timeline.

Managing Construction Costs

Construction loans typically don't cover everything. Out of Contract Items not included in your building contract must be funded separately. These might include:

• Landscaping and driveways
• Additional electrical or plumbing work
• Upgrades beyond standard specifications
• Council fees and connection charges

Most lenders charge a Progressive Drawing Fee for each drawdown, typically ranging from $300 to $500 per payment. Factor these costs into your overall budget when planning your project.

Timeline Considerations

Lenders require you to commence building within a set period from the Disclosure Date, usually 6-12 months. This timeline ensures your loan terms and interest rate remain current throughout the construction process.

Before starting your project, make a plan that considers:

• Suitable land - Ensure your block meets council regulations and restrictions
• Ideal location - Consider proximity to amenities and future growth
• Price range - Include construction costs, fees, and contingencies
• Council restrictions - Some areas have specific building requirements

If you're planning to demolish existing property before building, additional approvals and timing considerations apply.

Types of Construction Projects

Construction loans can fund various project types:

• New builds on vacant land
• Knock-down rebuilds where you demolish existing property
• Major renovations requiring staged payments
• House & land packages with coordinated settlement

Some clients use a home improvement loan for smaller renovations that don't require progressive payments, though construction loans offer more flexibility for larger projects requiring various stages of payment.

Settlement at Completion

Once construction reaches practical completion, your construction loan converts to a standard home loan. This final settlement includes:

• Final valuation to confirm completed value
• Conversion to principal and interest repayments
• Updated loan documentation reflecting the completed property
• Release of any retained amounts held by the lender

Any additional payments beyond the original contract amount will need separate approval from your lender.

Construction loan settlement requires careful coordination between multiple parties - your builder, solicitor, lender, and mortgage broker. Working with experienced professionals who understand the process helps ensure your project proceeds smoothly from foundation to completion.

Pollux Financial specialises in construction loans and can guide you through every stage of the settlement process. Our team understands the specific requirements of Canberra builders and council regulations, making your construction finance journey more manageable.

Call one of our team or book an appointment at a time that works for you to discuss your construction loan options and settlement requirements.