Construction Loan Progress Payments - Mortgage Domayne

Construction Loan Progress Payments

January 20, 2024

A wonderful surprise for us earlier in the week having received an email from productreview.com.au advising as that we are 2024 Award Winners based on the 611 (and counting!) five star reviews we have received from clients.

We recognise that our ongoing success as a business is intrinsically linked to the quality of service we provide to our referral partners and our clients, so this award gives us great comfort that we are continuing to do things right.

In this week’s newsletter, we take a look at construction loans and how progress payments work.

Construction loans distinguish themselves significantly from regular home loans due to a concept known as progressive drawdown which are specifically designed to align with the construction process.

How does a construction loan work?

Construction loans are typically interest-only payments for the construction period, normally set at 12 months. Being interest only minimises the financial burden during the construction phase before transitioning to a principal and interest loan at the conclusion of the construction period.

An even bigger difference between construction loans and home loans is how your repayments are calculated. A standard home loan charges the borrower interest on the full loan amount, but a construction loan divides the loan into stages based on what part of the building process is occurring, a method known as progressive drawdown or progress payments, with interest only being payable on the amount drawn down.

What is progressive drawdown, and how does it work?

The progressive drawdown process for a loan typically involves five stages:

Deposit

5%
Payable upon signing of contract

Slab

Approximately 20% draw down
Laying the foundation, levelling the ground, plumbing, and waterproofing the foundation.

Frame

Approximately 20% draw down
Building the frames, partial brickwork, roofing, trusses, and windows.

Lockup

Approximately 25% draw down
External walls, lockable windows, and doors.

Fit out

Approximately 20% draw down
Gutters, plumbing, electricity, plasterboards, and the partial installation of cupboards.

Completion

Approximately 10% draw down
Finishing touches, final plumbing, electricity, overall cleaning, and final payments for equipment and builders.

To move through each stage of the construction loan, borrowers need to provide the lender with a completed Payment Request Form and an
invoice from the builder.

Before drawdown payments are made, a progress inspection is undertaken to verify that the works have been completed in line with the building schedule.

Depending on the relevant lender guidelines, inspections maybe required at the completion of every stage, or in some cases, only at the completion of the first and final stages of the build.

Construction loan fees and charges

Most lenders charge $300 to $400 overall ($60 – $80 per progress payment) with some lenders charging as much as $1,500 (Macquarie).

If you have clients who would like to know more about how this process works, or information about interest rates and other costs, have them contact us on 1300 366 296.

Variable

The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR.

1 Year Fixed

The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR. At the end of the three year fixed period, the borrowers interest rate will revert to a standard variable rate for the life of the loan.