How Do Construction Loans Work in Australia and What Should Builders Compare?

Construction loans work differently from a standard home loan because the funds are released in stages as your build progresses, rather than as a single lump sum. This staged approach—commonly called progress payments—is designed to align the lender’s funding with key milestones in the building contract, helping to manage risk for both you and the lender.

OzLoan provides general loan research, comparison information and calculator tools. If you’re comparing construction loans, our free calculators can help you model the numbers before you speak to a lender or broker. You can also submit a service enquiry and OzLoan may assist within the scope of an authorised credit representative. OzLoan is not a lender, does not promise approval, rates or savings, and does not give personal financial advice.

How progress payments typically work

In a construction loan, the lender makes payments directly to your builder at agreed stages. A typical five-stage structure might look like:

• Slab or base stage – site cut, foundations and slab poured.
• Frame stage – wall and roof frames completed.
• Lock-up stage – external walls, windows and doors installed so the building is secure.
• Fixing or internal lining stage – plasterboard, internal doors, architraves and cabinetry installation.
• Completion stage – final fit-off, painting, plumbing, electrical and handover.

You generally pay interest only on the money that has been drawn down, so your interest bill grows as the build advances. That’s why comparing loan structures and not just the headline interest rate matters—small differences in how interest is calculated or when payments fall due can add up over the course of a project.

What builders should compare

Whether you’re an owner-builder or working with a registered builder, the loan features you compare can make a real difference to your cash flow and total cost. Key areas to look at include:

• Interest rate and comparison rate – The comparison rate combines the interest rate with most upfront and ongoing fees, giving a truer picture of cost.
• Repayment type during construction – Most construction loans are interest-only during the build period, with principal-and-interest repayments starting once the home is complete. Understand when the switch happens and what the post-construction repayments will be.
• Fees – Look for application fees (sometimes called establishment or setup fees) and ongoing monthly or annual service fees. These vary widely between lenders.
• Loan features – Consider whether you want an offset account that can reduce interest during construction, or a redraw facility that lets you access extra repayments later. Weigh whether you’ll actually use these features, because they can add to the loan’s cost.
• Fixed vs variable rate – A fixed rate gives repayment certainty through the fixed period but may limit extra payments or attract a break cost if you refinance early. A variable rate offers flexibility and often allows extra repayments, but your interest cost can rise if market rates move up.
• Loan term – A shorter loan term means higher repayments but less total interest paid over the life of the loan. A longer term keeps monthly repayments lower but increases total interest.

Where to start your research

Moneysmart.gov.au provides independent guidance on comparing home loans, including a mortgage calculator that lets you test different interest rates, loan terms and repayment types. While Moneysmart doesn’t lend money or provide personal financial advice, its tools are a solid starting point for understanding the cost implications of different loan choices.

At OzLoan, we publish independent, general research on the Australian home-loan market in plain English. Our free calculators can help you model scenarios before you approach a lender. Remember, when comparing loans, it’s wise to look beyond a single comparison website—these sites are businesses and may not cover all available options. If you decide to use a mortgage broker, Moneysmart suggests asking the right questions to get a loan that meets your needs and is value for money.

Construction loans are complex, but taking the time to compare structures, progress payment terms, fees and features helps you avoid unnecessary costs and keeps your project on a sound financial footing.