Settlement on a construction loan happens in stages, not as a single event.
You'll draw funds progressively as the build reaches documented milestones, with each drawdown requiring a progress inspection and payment authorised by your lender. The loan converts to a standard mortgage once the final drawdown is complete and you receive the occupation certificate. Understanding how this process unfolds gives you control over timing, cash flow, and the relationship between your builder and your funding.
How Construction Loan Drawdowns Are Structured
Most lenders follow a five or six stage drawdown schedule aligned to fixed price building contracts. The first payment covers the deposit and base stage, usually around 5% to 10% of the contract value. Subsequent payments are tied to frame stage, lock-up, fixing, and practical completion. Each payment is released after a progress inspection confirms the work has been completed to the documented standard.
The lender only charges interest on the amount drawn down at each stage, not the full approved loan amount. If your land and construction package in Kellyville is valued at $1.97 million and you've drawn $400,000 to cover the land purchase and base stage, you're only paying interest on that $400,000 until the next drawdown is approved. This structure keeps your holding costs lower during the build period compared to a fully drawn loan.
What Happens Between Land Settlement and First Drawdown
You'll settle on the land first, either as a separate transaction or as part of a house and land package. Once the land is in your name, the builder needs council approval and final plans before work can begin. Most construction loans require you to commence building within a set period from the disclosure date, typically six to twelve months depending on the lender.
During this period, you're paying interest on the land component only. If you've purchased suitable land in an established pocket of Kellyville near Memorial Avenue or Wrights Road, you may already have full council plans in place, which shortens the gap between land settlement and base stage. If you're in a newer release area closer to Hezlett Road, the builder may need to finalise engineering details or satisfy specific conditions, which can extend this period by several months.
Progress Inspections and the Role of the Valuer
Each time your builder requests a progress payment, the lender arranges a progress inspection through an independent valuer. The valuer confirms that the work matches the stage claimed, that materials and workmanship meet acceptable standards, and that no defects or delays would affect the value of the completed home. The lender won't release funds until the valuer's report is received and approved.
The valuer doesn't assess whether the builder has paid sub-contractors, plumbers, or electricians. That's a contractual matter between you and the builder. But if the valuer identifies incomplete work or quality concerns, the lender may withhold part of the drawdown or require rectification before releasing funds. Most lenders charge a progressive drawing fee for each inspection, typically $300 to $500 per stage, which is added to your loan balance or paid upfront depending on the loan structure.
Converting to Principal and Interest Repayments
Once you receive the occupation certificate and the final drawdown is complete, the loan converts from interest-only to principal and interest repayments. The lender will revalue the completed property to confirm it matches the approved loan amount, and you'll start making full repayments based on the total drawn balance.
If you've been making additional payments during the construction period, those amounts sit in an offset or redraw facility depending on your loan product. Some borrowers use this period to build a buffer before full repayments begin, particularly if they're selling an existing property or managing dual holding costs. If you're building in Kellyville while renting elsewhere, this transition point is when your monthly outgoings increase, so it's worth modelling the repayment amount well before practical completion.
Fixed Price Contracts and Cost Overruns
A fixed price building contract protects you from variations in material or labour costs during the build. The builder agrees to complete the home for a set contract price, and any cost increases are absorbed by the builder unless you request changes or upgrades. This structure works well with construction finance because the lender approves the loan amount based on the contract price, and the progress payment schedule is locked in from the start.
If you're working with a cost plus contract or managing the build as an owner builder, the lender will assess your application differently. You'll need to demonstrate experience, provide detailed cost breakdowns, and accept more frequent valuations to ensure the loan amount remains aligned with the work completed. Most first home buyers in Kellyville use a fixed price contract with a registered builder because it offers certainty and aligns with lender requirements without additional complexity.
Timing the Final Payment and Handover
The final progress payment is usually held back until you've completed a handover inspection with the builder and signed off on any defects or incomplete items. The lender releases this payment once the occupation certificate is issued and the valuer confirms practical completion. This is typically 5% to 10% of the contract value, and it gives you leverage to ensure the builder addresses any outstanding issues before final settlement.
If you're coordinating a sale and purchase, this timing becomes critical. Consider a buyer who sold their townhouse in Bella Vista with a 90-day settlement and started building a custom home in Kellyville expecting a six-month build. If the builder runs four weeks behind due to wet weather or material delays, that buyer may need to arrange short-term accommodation or extend the settlement on their existing property. Building in contingency at both ends of the timeline reduces pressure and gives you room to manage delays without financial stress.
Call one of our team or book an appointment at a time that works for you. We'll walk through your construction loan application, connect you with lenders who understand progress payment finance, and make sure the drawdown schedule aligns with your builder's timeline and your cash flow.
Frequently Asked Questions
How does settlement work on a construction loan?
Settlement happens in stages as the build progresses, not as a single event. You draw funds at documented milestones after each progress inspection, and the loan converts to a standard mortgage once the final drawdown is complete and you receive the occupation certificate.
Do I pay interest on the full loan amount during construction?
No, lenders only charge interest on the amount drawn down at each stage. If you've drawn $400,000 for land and base stage, you only pay interest on that amount until the next drawdown is approved.
What is a progress inspection and who arranges it?
A progress inspection is conducted by an independent valuer to confirm that the work matches the claimed stage and meets acceptable standards. The lender arranges the inspection each time your builder requests a progress payment, and charges a progressive drawing fee for each one.
When does a construction loan convert to principal and interest repayments?
The loan converts once you receive the occupation certificate and the final drawdown is complete. The lender will revalue the completed property and you'll start making full principal and interest repayments based on the total drawn balance.
What happens if my builder runs behind schedule?
Delays extend the period before final settlement and conversion to full repayments. If you're coordinating a sale or managing dual holding costs, building in timeline contingency at both ends reduces financial pressure and gives you room to manage delays without stress.
