Construction Loan: Requirements and Progress Payments

A construction loan funds a new home or a major renovation in stages, paying the builder as each stage is finished. The borrower pays interest only on the amount drawn so far, then moves to ordinary repayments once the build is complete. To approve one, lenders need a building contract with a licensed builder, usually at a fixed price, plus approved plans and a valuation of the finished home.

The lender also needs proof of the borrower’s own contribution, and that money goes to the builder before the first loan draw. When the valuation comes in short or the client adds a variation, the extra cost comes from the client’s funds, not the loan. Plan the contribution and a contingency before you lodge.

Construction Home Loan Basics

A construction loan differs from a standard home loan in when the money moves. A standard purchase loan settles in one payment, while a construction loan releases money in progress payments against the builder’s stage invoices. Interest builds as the drawn balance grows.

The building contract sets the stages. CommBank’s construction loan guide, as at October 2026, describes five stages of building a house and the approximate share of funds each one uses.

Stage	Work completed	Approximate share of funds
Slab	Foundation slab measured and poured	15% to 20%, which can include the builder’s deposit
Frame	Walls, structures and conduits for electrical and plumbing	20%
Lock-up	Windows, doors, external walls and roofing	20%
Fit-out	Internal fittings and fixtures	30%
Completion	Contracted items such as fencing, site clean-up, painting and detailing	10%

A typical file moves through these steps in order:

1. Pre-approval, which shows how much the client can likely borrow before they choose a design or builder.
2. The signed fixed-price building contract with its progress payment schedule.
3. Land settlement, when the client is buying the land as well as building on it.
4. The lender’s valuation of the home as if complete.
5. Formal approval and the lender’s commencement letter to the builder, which confirms building can start.
6. The client’s contribution paid to the builder, with receipts sent to the lender.
7. Staged draws against signed invoices, with the lender’s inspections where required.
8. The final inspection and final payment, then conversion to ordinary repayments.

A land and construction loan covers the land purchase and the build when the building contract is already in place. Land bought before any building contract exists is a separate transaction, covered by the vacant land loan guide. CommBank’s guide allows up to two dwellings, such as a duplex, on one title under a single building contract.

Before Approval

A construction file is ready for approval when the land, the approved plans, the building contract and the builder’s insurance all line up. Check each one before you lodge, because a gap in any of them holds up the first draw.

Check Land, Plans, Approvals and the Building Contract

Westpac’s guide to residential construction loans, as at October 2026, lists the construction documents it needs with the application:

• council-approved plans and specifications, or the plans submitted for approval
• a signed and dated building contract that includes the building stages and the schedule of payments
• any variations or quotes
• a quantity surveyor report, where the valuer asks for one

The same guide asks you to confirm the builder holds a current licence with the state’s fair trading or consumer affairs body before the client signs. Westpac also needs the builder’s public liability insurance before it releases any funds. CommBank’s checklist, as at October 2026, asks for contract works insurance at least equal to the contract price and public liability cover of at least $5 million.

Domestic building insurance is a separate state requirement. In Victoria, builders need it for work over $16,000, according to Consumer Affairs Victoria (page updated 1 October 2026). The builder must give the client a certificate of currency before taking a deposit.

The domestic building insurance certificate guide explains how to check the certificate.

How Contract Terms Change the Lender’s Risk

A fixed-price contract fixes the cost the lender lends against, so lenders prefer it. Helia, an Australian lenders mortgage insurance (LMI) insurer, requires a fixed-price contract from a licensed builder for construction loans under its 10 August 2026 underwriting guidelines. CommBank accepts only fixed-price contracts up to $1 million, and above that it also considers cost-plus contracts, subject to its approval.

A cost-plus contract lets the builder pass on rises in labour or material costs, so the final price can move after approval. Variations do the same thing on a fixed-price contract. Westpac asks to be told immediately when the contract price changes and may order a new valuation if the change is large.

Contingency funds cover what the contract leaves out. Lenders pay only up to the amount in the progress payment schedule, so overruns and unapproved variations fall to the client. A client who keeps a buffer of their own can absorb a variation without stalling the next draw.

Fixed-Price and Turnkey Contracts Versus Progress-Funded Work

A turnkey contract is a fixed-price contract that includes the finishes needed to move in. A turnkey build can still bill in stages and run through progress draws like any other build.

Some contracts take only a deposit and then the whole balance at handover, which leaves no stage claims to fund. For those, ask the lender how it will assess the file before you assume the draw process.

The off-the-plan and house and land finance comparison helps you decide which finance path fits before the file enters this workflow.

Application, Pre-Approval and Timing

Pre-approval can come before the contract is signed. ANZ’s construction loans handbook, as at October 2026, says it can issue an approval in principle before the client has plans or a contract. Full approval follows once the signed contract and plans arrive and the valuation is complete.

Lenders set deadlines from approval onward. ANZ’s letter of offer is valid for six months, and the first draw must be requested within that time. CommBank requires building to start within 12 months of the disclosure date on the loan contract and finish within 24 months of the first progress payment.

Minimum loan sizes vary. As at October 2026, ANZ’s construction loan page lists a $20,000 minimum on its Standard Variable loan and $50,000 on Simplicity PLUS. La Trobe Financial sets a higher floor of $100,000, so a smaller construction loan needs another lender.

Common Reasons a Construction Loan Is Declined

Most declines and delays trace back to one of these gaps:

• Borrower evidence: income, expenses or the contribution can’t be verified, or serviceability falls short of the full loan.
• Builder: the builder’s licence or insurance isn’t current.
• Contract: a cost-plus contract below the lender’s threshold, or a payment schedule outside the lender’s stage limits.
• Permits: plans without council or certifier approval. CommBank pays for extras such as a pool or shed only once their approval arrives.
• Valuation: an on-completion valuation below the contract and land cost, which lowers the maximum loan.

Contract type, minimum loan size, inspection rules and stage limits differ from lender to lender. Bulma’s Policy Advisor answers these construction policy questions across 52+ lenders and quotes the policy wording behind each answer, which you can keep in your file notes. For one lender’s full set of construction, interest-only and self-employed conditions, read the Bankwest lending policy guide.

This guide covers builds with a licensed builder. When the client will be their own builder, the owner-builder construction loan guide covers the different lending rules.

Renovation Construction Loans

A renovation uses construction finance when the work is structural and paid in stages. ANZ’s construction loan page, as at October 2026, describes a major structural renovation as moving walls, adding a room or changing the roofline. Knock-down rebuilds use the same loan.

Smaller jobs often go through a top-up instead. CommBank’s guide, as at October 2026, says a top-up to an existing home loan, paid as a lump sum, can often fund kitchen or bathroom upgrades. The same applies to cosmetic changes such as flooring and painting.

That’s the practical difference between a renovation loan and a construction loan. The top-up pays out once, while the construction loan pays in stages against invoices.

For a renovation construction loan, lenders want the same records as a new build:

• a fixed-price contract with a licensed builder (CommBank accepts only fixed-price contracts up to $1 million)
• council-approved plans where the work needs approval
• quotes for any work outside the builder’s contract, or receipts for items already bought
• a quantity surveyor report when the valuer asks for one, which Westpac’s guide, as at October 2026, says can apply to major extensions and renovations

CommBank values the finished property without any outside-contract items that lack a quote or receipt. Under its August 2026 guidelines, Helia insures renovation loans to 95% of the revised on-completion valuation. The lender must make sure the funds go into the property and the work is finished.

Funds and Progress Draws

The client’s contribution is spent first, then the lender pays each stage claim from the loan. CommBank, ANZ and Westpac all require the borrower’s own funds to reach the builder before the first loan draw, as at October 2026.

Contributions, Contingencies and Valuation Assumptions

The contribution is the gap between the project cost and the loan. CommBank asks for proof that the client paid it, such as a builder’s tax receipt or a bank receipt showing the builder’s name, BSB and account number. The lender can then fund the builder’s deposit from the loan, provided the deposit is a milestone in the progress payment schedule.

Lenders treat cost overruns differently. CommBank pays only up to the scheduled amount for each stage, and the client funds anything above it. ANZ’s handbook says it may cover a shortfall under $5,000 during construction, repaid at the end, while a larger shortfall comes from the client’s savings.

The valuation sets the lending limit, so a variation that adds cost without adding value widens the gap. In CommBank’s example, a client swaps a $20,000 ducted air conditioner for an $8,000 split system and spends the $12,000 difference on bathroom upgrades. The bank removes $12,000 from the undrawn loan, and the client pays for the upgrades before the next draw.

Map Invoices and Inspections to Each Stage

Each progress payment follows the same cycle:

1. The builder finishes a stage and issues an invoice that matches the progress payment schedule.
2. The client checks the work, then signs and dates the invoice to authorise payment.
3. You or the client send the signed invoice to the lender.
4. The lender orders a progress inspection where its rules require one.
5. The lender pays the builder and the drawn balance rises.

Inspection rules vary by lender. At Macquarie, as at October 2026, contracts under $600,000 get inspections at the first and final stages, and larger contracts get one at every stage. When Westpac requires an inspection, its valuer must certify the stage before any payment is released, including the opening and closing payments.

Allow time for each step. Westpac adds three working days when an inspection is needed, and Macquarie allows up to 10 business days for an inspection. CommBank asks for signed invoices at least five business days before they fall due on contracts under $1 million.

The lender’s inspections check that the stage matches the plans, not the quality of the work. CommBank’s guide says they don’t endorse the builder’s workmanship, so suggest an independent building inspector before the client signs a claim.

Construction Loan Repayments and Interest

During the build, the client pays interest on the drawn balance, not the full loan. CommBank charges the interest accrued on the drawn amount on the 15th of each month, so payments rise as more money is released. The client does pay the mortgage while the house is being built, but only the interest on what’s drawn.

This fictional Victorian example shows the drawn balance at each stage. The client buys land for $400,000 and signs a $500,000 fixed-price contract.

The loan pays $320,000 of the land price at settlement and the client pays $80,000. The client then pays $116,000 to the builder before the first construction draw, and the loan funds the rest.

The stage percentages follow the “build all stages” schedule from Consumer Affairs Victoria (page updated 30 June 2026), which leaves the last 10% for completion. Interest uses an assumed rate of 6.5% a year.

Stage	Contract share	Paid by client	Paid by loan	Drawn balance after stage	Approximate monthly interest
Land settlement	Not applicable	$80,000	$320,000	$320,000	$1,733
Deposit	5% ($25,000)	$25,000	$0	$320,000	$1,733
Base	10% ($50,000)	$50,000	$0	$320,000	$1,733
Frame	15% ($75,000)	$41,000	$34,000	$354,000	$1,918
Lock-up	35% ($175,000)	$0	$175,000	$529,000	$2,865
Fixing	25% ($125,000)	$0	$125,000	$654,000	$3,543
Completion	10% ($50,000)	$0	$50,000	$704,000	$3,813

Ongoing loan servicing and the lender’s serviceability test are separate things. The monthly interest above is what the client pays during the build. The serviceability test asks whether the client’s income supports repayments on the full approved loan, so a low first interest bill doesn’t mean a larger loan is affordable.

Investment Construction Loans

For an investment build, keep records of each loan’s purpose, its draw dates and the interest charged on it. The Australian Taxation Office (ATO) guidance on deductions for vacant land was last updated on 22 June 2026. It treats interest on a construction loan differently from interest on the loan used to buy the land.

In the ATO’s example, an investor who borrows separately for the land and the build can claim the construction loan interest. The land loan interest isn’t claimable while the land counts as vacant, which lasts until the house can lawfully be occupied and is leased or available for lease. When one loan funds both purposes, the interest must be apportioned.

Separate loan splits for the land and the build make those records easier to keep. Note the date the occupancy certificate is issued and the date the property is listed for rent. Your client’s tax adviser confirms what they can claim.

Completion

The final payment is released once the lender confirms the build matches the approved plans. CommBank’s guide, as at October 2026, asks for these records before the final progress payment:

• the final invoice, signed and dated to authorise payment
• any final variations to the building contract
• the home building insurance policy, such as a certificate of currency
• the certificate of occupancy or the state equivalent, which CommBank asks the client to keep for their records

The lender then arranges a final inspection. CommBank pays the builder once all items are complete and acceptable. Westpac’s guide, as at October 2026, also needs a satisfactory final inspection from its valuer and a new building insurance quote.

Defects are a matter between the client and the builder. CommBank won’t take part in a builder dispute, but it stops progress payments while the dispute runs. The client authorising the final invoice tells the lender the work is complete, so they should check the work first.

Undrawn funds stay with the loan. Westpac makes any surplus available only after the final draw. Macquarie’s help page, as at October 2026, says surplus construction funds go back to the loan account, available for redraw.

The loan leaves construction status on the final payment. At CommBank, the client makes a final interest payment that day, the contracted loan term starts and progressive drawing fees are added to the loan. The first ordinary repayment falls due one month later.

Time limits also apply. If a CommBank build runs past 24 months from the first progress payment, the loan may be treated as fully drawn. Repayments switch to the type chosen at approval and the undrawn balance is removed.

Deposit, Equity and Funds to Complete

The borrower contribution is the project cost less the loan the lender will make. The lender caps that loan at its maximum loan-to-value ratio (LVR), applied to the lower of the project cost and the on-completion valuation. The client pays the contribution first, before any construction draw.

Helia’s 10 August 2026 guidelines define construction LVR as the loan divided by the lesser of the cost price and the on-completion valuation. The cost price is the land purchase price plus the building cost in the tender. Helia insures construction loans with a licensed builder up to 95% LVR for a home the client will live in, with the premium added on top.

Work Out the Contribution

Using the fictional Victorian file, this calculation shows where the contribution comes from. It assumes a lender maximum of 80% LVR, so no LMI applies, plus $22,000 in assumed stamp duty and purchase costs.

Item	Amount	Basis
Land price	$400,000	Contract of sale
Building contract	$500,000	Fixed-price contract
Project cost	$900,000	Land plus building contract
On-completion valuation	$880,000	Lender’s valuation of the finished home
Maximum loan	$704,000	80% of the lower figure, $880,000
Contribution to the project	$196,000	Project cost less the loan
Purchase costs	$22,000	Assumed stamp duty and settlement costs
Contingency	$25,000	5% of the contract, held by the client
Funds to complete	$243,000	Contribution, purchase costs and contingency

The contribution is spent in two parts. The client pays $80,000 at land settlement and the other $116,000 to the builder before the first construction draw.

Equity in Land the Client Already Owns

Land equity can take the place of cash. If the client already owns the land outright and the lender accepts it at $400,000, the loan needs to cover only the $500,000 contract. That’s about 57% of the $880,000 on-completion valuation, so no cash contribution goes into the build.

The client still needs cash for purchase costs and a contingency. Check how the lender values the land the client owns before you rely on that figure.

Which Limit Sets the Loan

Three separate limits decide how much the client can borrow for a construction loan. The lowest one sets the loan.

Limit	What decides it	Fictional figure
Serviceability	The client’s income and expenses tested against the lender’s servicing rules	$760,000
Security	Maximum LVR applied to the lower of project cost and on-completion valuation	$704,000
Project cost	Land, contract and costs, less the funds the client puts in	$704,000 with $243,000 in funds to complete

Here the security limit sets the loan. A higher income wouldn’t raise the loan, because the valuation and LVR cap it at $704,000.

When the Valuation or Contract Changes

A short valuation lowers the loan and raises the funds needed. If the lender values the finished home at $860,000 instead of $880,000, the loan falls to $688,000 and the contribution rises by $16,000.

The client in this example holds $250,000. Their funds to complete rise from $243,000 to $259,000, which is $9,000 more than they hold. They can cover it only by using part of the $25,000 contingency, which leaves $16,000 for the rest of the build.

A $15,000 variation works the same way. The lender pays only the scheduled amounts, so the client funds the variation from the contingency, leaving $10,000. Both changes together would use $31,000, more than the $25,000 contingency.

From Interest-Only to Full Repayments

Interest-only repayments during construction follow the actual drawn balance and the lender’s draw terms. In the fictional file, monthly interest rises from about $1,733 after land settlement to about $3,813 once the full $704,000 is drawn.

After the final payment, the loan converts to the repayment type chosen at approval. On principal and interest over 30 years at the assumed 6.5% a year, the repayment on $704,000 is about $4,450 a month. The full repayment is roughly $640 a month more than the last interest-only payment, so test the client’s budget against the full repayment.

If the client is selling an existing home to fund the contribution, the bridging loan requirements guide covers the debt during that overlap. First home buyer grants and two-contract package timing are in the first home house and land package guide. When the build and borrower facts are set, the construction loan lenders comparison helps you compare providers.