How to Understand Construction Loan Fees

Building a home in Glenelg means understanding the fee structure before you commit to a lender.

Construction finance works differently to a standard mortgage because funds are released progressively as your build advances. Each of those releases attracts a fee, and those fees compound across the life of your project. The most significant is the progressive drawing fee, charged every time your lender inspects the site and releases funds to your builder. Depending on your lender, you might pay between $150 and $400 per drawdown, and most residential builds involve five to seven drawdowns from slab stage through to completion.

Progressive Drawing Fees and How They Add Up

A progressive drawing fee covers the cost of a lender-appointed valuer or inspector visiting your site to confirm that the work claimed in your builder's invoice has been completed to an acceptable standard. Once satisfied, the lender releases the next instalment.

Consider a buyer building a custom home on a block near the Patawalonga Basin. The build involves six scheduled progress payments aligned with slab, frame, lock-up, fixing, practical completion, and final completion stages. If the lender charges $300 per drawdown, that buyer pays $1,800 in inspection fees alone. Some lenders cap the number of inspections or bundle them into a single upfront fee, while others charge per visit without limitation. If your builder requests an additional drawdown due to variations or delays, you pay again.

The lesson is to confirm the inspection fee and the estimated number of drawdowns before you sign anything. Lenders who advertise low application fees sometimes offset that with higher per-drawdown charges, so the total cost across the build can exceed what you would pay with a lender charging more upfront but less per inspection.

Application and Establishment Fees

Most lenders charge an application fee when you submit your construction loan application. This fee typically ranges from $300 to $800 and is non-refundable, even if your application is declined or you withdraw.

Establishment fees cover the administrative cost of setting up the loan and can range from zero to $600 depending on the lender and loan amount. Some lenders waive establishment fees during promotional periods, while others roll them into the loan balance. If you are building on suitable land you already own, these upfront costs can be factored into your overall borrowing, but if you are purchasing land and building simultaneously through a land and construction package, you need to ensure you have enough cash to cover both the land settlement and the initial fees before the first drawdown is approved.

Interest Charges During Construction

You only pay interest on the amount drawn down, not the full approved loan amount. During the build, most lenders offer interest-only repayment options, meaning you service the interest on funds released to date without reducing the principal.

In a scenario where a buyer in Glenelg has a $500,000 construction loan and the first drawdown of $100,000 is released at slab stage, they pay interest only on that $100,000 until the next drawdown. If the build takes eight months and the average amount drawn is $250,000 across that period, the total interest paid during construction might be around $10,000 to $12,000 depending on the construction loan interest rate at the time. Once the build reaches practical completion, the loan converts to a standard principal and interest mortgage unless you have arranged a construction to permanent loan structure that continues interest-only for a set period.

Some lenders allow you to capitalise the interest during construction, adding it to the loan balance rather than requiring monthly payments. This can help with cash flow if you are also paying rent or a mortgage on your current home, but it increases the final loan amount and the interest you pay over the life of the loan.

Valuation and Legal Fees

Before approving your construction funding, the lender orders a valuation of both the land and the proposed dwelling based on the council-approved plans and your fixed price building contract. Valuation fees range from $300 to $600 depending on the complexity of the project and the location. If you are building a custom design rather than a project home, the valuer may charge more to assess the completed value.

Legal fees cover the cost of preparing and registering the mortgage. These typically range from $800 to $1,500 and are paid at settlement. If your build involves a land and build loan where you settle on the land first and then draw down for construction, you may incur legal fees at land settlement and again when the construction loan is formalised, though many lenders structure this as a single settlement to reduce duplication.

Council and Approval Costs

While not charged by your lender, council approval and development application fees are part of the total cost of building and can affect how much you need to borrow. In Holdfast Bay, where Glenelg is located, a development application for a new dwelling typically costs between $1,000 and $2,000 depending on the size and complexity of the build. Your registered builder usually manages this process, but you are responsible for the cost.

If your project requires additional approvals such as land division, heritage assessment, or stormwater compliance, those fees increase. These costs are paid before construction begins, so they need to be factored into your deposit and upfront cash requirements, not deferred to the first drawdown.

Comparing Fee Structures Across Lenders

Not all construction finance providers structure their fees the same way. Some charge higher upfront fees but lower per-drawdown costs. Others waive application fees but charge $400 per inspection. A few lenders offer a single fixed fee covering all inspections regardless of how many occur, which can be useful if your builder has a history of requesting additional drawdowns or if you are undertaking a cost plus contract where the final number of payments is less predictable.

When comparing lenders, add up the total estimated fees across the life of the build, not just the headline figures. A lender advertising no application fee might cost you $2,400 in inspection fees across six drawdowns, while another charging $600 upfront might limit inspections to a flat $1,200 total. The second option saves you $600 even though it looks more costly at first glance.

If you are working with a finance and mortgage broker, they can model the total cost across multiple lenders based on your specific progress payment schedule and builder contract. This is particularly useful if you are building a custom home with a non-standard drawdown structure or if you are an owner builder where additional inspections and compliance checks are more common.

How to Budget for Construction Loan Fees

Work backwards from your total project cost and identify every fee you will pay before the first drawdown, during the build, and at practical completion. For most buyers in Glenelg building a new home, this includes application fees, establishment fees, valuation, legal costs, council approval, and progressive drawing fees.

If your total build cost is $450,000 and you have a 10% deposit, your loan amount is $405,000. Add another $4,000 to $6,000 in fees depending on your lender and drawdown schedule. If you do not account for this in your initial borrowing, you will need to cover those fees from savings, which can leave you short on cash for unexpected variations or extended build timelines.

Most lenders allow you to borrow up to 90% of the combined land and construction value, but the fees are typically paid from your own funds unless you have sufficient equity or a guarantor. If you are a first home buyer using the First Home Owner Grant or a stamp duty concession, factor those into your cash flow but do not rely on them to cover lender fees, as those grants are usually paid at settlement or after completion.

Call one of our team or book an appointment at a time that works for you to review your construction budget and confirm which fees apply to your specific build and lender.

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