Avoid These 7 Construction Loan Settlement Mistakes

What Happens at Construction Loan Settlement

Construction loan settlement doesn't work like a standard home loan where funds are released in full on a single day. Instead, settlement marks the point where your loan is formally established and the first drawdown is released, typically covering the deposit to your builder and any land purchase if you're buying through a land and construction package. From that point, funds are released progressively as your build reaches specific stages, with each drawdown requiring a progress inspection and signed documentation from your registered builder.

Consider a buyer in Brighton who settled their construction loan in late spring with plans to start building immediately. The loan was approved for the full project cost, but only the initial deposit amount was drawn down at settlement. The remaining funds sat in the loan account, waiting for each stage to be completed. Because they only owed interest on what had been drawn down, their initial repayments were lower than expected, but they hadn't budgeted for the Land Management Agreement fees or the ongoing council rates during construction. By the time the frame was up, they'd spent close to $4,000 in holding costs they hadn't factored into their original budget.

The Mistake of Assuming All Funds Are Available Immediately

Your loan is approved for a total amount, but that doesn't mean you can access it all at once. Lenders release funds according to a progress payment schedule that aligns with your fixed price building contract. Each stage, whether it's base, frame, lock-up, or fixing, requires a progress inspection by the lender's valuer before the next payment is authorised. If your builder moves ahead faster than expected or encounters delays that push the schedule out, your cash flow needs to adjust accordingly.

We regularly see this create problems when buyers assume they can cover variations or upgrades mid-build by drawing down early. The money might be approved, but it's not accessible until the corresponding stage is reached. If you've added $15,000 in upgrades during the slab stage, you'll need to fund that separately until the drawdown catches up.

Why the Progress Payment Schedule and Your Contract Must Match

Your lender structures their progressive drawdown around the stages listed in your building contract. If your builder's progress payment schedule doesn't align with what the lender expects, you'll face gaps where funds aren't released when your builder expects payment. Most lenders work from a standard five or six stage schedule, but some builders, particularly those working on custom design homes, might break the project into more granular stages or request payment at different milestones.

Before settlement, your broker should confirm that the payment schedule in your fixed price contract matches the lender's drawdown structure. If there's a mismatch, either the contract needs to be amended or the lender needs to agree to a modified schedule. Leaving this unresolved until after settlement can delay progress payments and damage your relationship with your builder, who relies on timely payments to keep subcontractors on schedule.

How Interest Accrues During Construction

From settlement onwards, you're charged interest only on the amount drawn down, not the full loan amount. As each progress payment is released, your balance increases and so do your repayments. This structure keeps costs lower during the early stages, but it also means your repayments will rise throughout the build as more funds are drawn.

Most construction loans offer interest-only repayment options during the construction phase, which can last anywhere from six to twelve months depending on the scope of your project. Once construction is complete and the final inspection is signed off, the loan typically converts to a construction to permanent loan with principal and interest repayments beginning. Some lenders build in a short buffer period after completion before the conversion happens, but others switch immediately, so understanding your lender's timeline is important for budgeting.

The Role of Council Approval and Timing Your Settlement

You can settle a construction loan before your development application has full council approval, but most lenders require you to commence building within a set period from the disclosure date, often six to twelve months. If your council plans are delayed or you encounter issues with soil testing or bushfire management in areas near the Brighton Golf Course or coastal zones, you could find yourself locked into a loan with the clock ticking but no ability to start the build.

In Brighton, where some blocks near the coast require additional environmental assessments or Heritage overlay approvals, it's worth confirming that your development application is well progressed before locking in a settlement date. If your builder hasn't secured council approval and you settle too early, you'll be paying interest on the initial drawdown without any construction activity occurring. Delaying settlement by even a few weeks can sometimes save thousands in unnecessary holding costs.

How Progressive Drawing Fees Add Up

Most lenders charge a progressive drawing fee each time a drawdown is processed, typically between $200 and $400 per stage. Over a standard six-stage build, that's up to $2,400 in fees that don't appear in your initial loan comparison but will be invoiced throughout the construction process. Some lenders cap the total number of drawdowns included in the loan and charge higher fees for additional stages, which becomes relevant if you're working on a custom home with a more detailed payment structure.

These fees are usually deducted from the drawdown amount before funds are released to your builder, so you'll need to account for them when confirming that each progress payment covers the contracted amount. If your builder is expecting $50,000 at lock-up and the lender deducts a $350 fee, the builder receives $49,650 unless you've made arrangements to cover the shortfall separately.

What Happens If Your Builder Requests Payment Before a Stage Is Certified

Builders occasionally request payment ahead of a formal stage completion, particularly if they've incurred significant costs for materials or subcontractor work that doesn't neatly fit into a single stage. Your lender won't release funds until their valuer has inspected and certified the stage, so if your builder needs payment before that happens, you'll need to cover the gap from your own resources or negotiate a delay with the builder.

This is more common on cost plus contracts where the payment structure is tied to actual expenses rather than fixed stages, but it can also occur on fixed price contracts if the builder has underestimated cash flow needs. Having a buffer account with $5,000 to $10,000 set aside for these situations can prevent delays and keep the relationship with your builder functioning as intended.

Construction loan settlement is the beginning of a process, not a one-time transaction. The way you structure the timing, align your contracts, and manage the progressive drawdowns will shape how smoothly your build progresses and how much you spend in holding costs along the way. If you're planning a build in Brighton or considering a land and build loan, call one of our team or book an appointment at a time that works for you. We'll work through your building contract, confirm the drawdown schedule matches your lender's structure, and make sure you're set up to handle each stage without unnecessary cost or delay.

Frequently Asked Questions