Construction Finance and Progress Payments

Funding a build is different from a standard home purchase, involving staggered payments based on construction milestones.

How Construction Loans Work

A construction loan is a specialised mortgage where the lender releases funds in stages rather than in one lump sum. This is known as 'progressive drawdowns'. During the build, you typically only pay interest on the amount that has been drawn down, which helps manage your cash flow while you may still be paying rent elsewhere. To secure a construction loan, the bank will need to see your signed building contract and council approved plans. They will then perform an 'as if complete' valuation to determine the future value of the property and decide how much they are willing to lend.

It is important to note that banks often have their own valuation of the site costs and the build price. If the bank's valuation comes in lower than the builder's contract price, you will need to cover the difference with your own cash. This 'valuation gap' is a common hurdle for new builds. Ensure your loan is fully approved and all conditions are met before you allow the builder to start works. If the bank refuses a progress payment due to a dispute or paperwork error, the builder may stop work, and you could be liable for late payment interest.

Standard Victorian Progress Payment Schedule

In Victoria, the Domestic Building Contracts Act 1995 sets out a standard schedule for progress payments. These stages are designed to ensure the builder is paid for work already completed, rather than getting too far ahead of the physical progress. The standard stages are: Deposit, Base, Frame, Close-in (Lockup), Fixing, and Completion. You should never pay for a stage until the work is actually finished. For example, the 'Frame' stage is not complete until the building surveyor has inspected and approved the frame. Paying early leaves you at financial risk if the builder disappears or goes bust.

Before you authorise a payment, you should visit the site to verify the work. While you may not be a technical expert, you can check that the roof is on (Lockup) or that the plaster and cabinetry are installed (Fixing). If you have hired an independent building inspector, they will provide a report for each stage to confirm the work meets Australian Standards. Many lenders will require a copy of the builder's invoice and sometimes a signed declaration from you before they release the funds to the builder's account. Always keep a record of every payment and the date it was made.

Handling Variations and Budget Overruns

A variation is a change to the original contract, such as choosing different tiles or adding an extra power point. Variations can quickly add up and blow your budget. In Victoria, variations must be in writing and signed by both parties. The builder must also explain how the variation will affect the completion date and the total price. Most banks will not increase your loan amount to cover variations once construction has started, so you must have a cash buffer to pay for these changes. A five to ten percent contingency fund is highly recommended for any building project.

If you run out of funds during the build, the consequences can be severe. The builder has a legal right to suspend work, and you may face penalty interest rates specified in the contract. To avoid this, be realistic about your finishing costs, such as landscaping, window furnishings, and driveways, which are often excluded from the main building contract. Check your loan documents for any 'expiry dates' on the construction period. If the build takes longer than the bank allows, you may need to reapply for the loan, which could be difficult if interest rates or your financial circumstances have changed.

• Get an 'as if complete' valuation from the bank
• Review the standard Victorian payment stages
• Never pay for a stage before it is complete
• Maintain a 10% cash contingency for variations
• Verify work with an independent inspector before payment