Construction loans, progress payments and how interest is charged
3 min read · reviewed 2 Nov 2026 · live figures as at 2 Nov 2026
A construction loan pays for a home as it is built, not all at once. That changes how you borrow, how interest is charged and what you need to check before each payment. This guide explains the general shape and marks clearly where only your lender's terms can answer.
How a staged loan works
You and a builder sign a building contract. The lender then pays the builder as work is completed, in instalments often called progress payments or drawdowns. RateSonar did not find a Moneysmart page that sets out the process, so what follows draws on what we could verify and on general questions to put to the lender:
- Consumer Affairs Victoria says that for building work you pay a deposit and then make payments as each stage finishes, and that "by law, you pay for completed stages". It lists the stages as base, frame, lock-up and fixing. Rules differ by state and territory, so check your state's building regulator.
- It also advises, before each progress payment, checking that the work has passed the building surveyor's inspection, meets your contract and is finished. You can hire an independent building consultant or inspector.
- Lenders have their own rules for releasing funds, such as valuations or inspections before each draw. Ask what yours requires, how long a release takes and whether there is a fee.
How interest is charged
Moneysmart's interest-only page (updated 29 October 2026) says interest-only structures may be useful for short-term loans such as a construction loan. Whether yours is interest-only during the build, and how interest is charged on funds drawn in stages, depends on the lender and product, so read your offer.
If your lender charges interest only on the balance drawn, this is how it looks. RateSonar's arithmetic, using the middle advertised standard variable owner-occupier rate as at 2 Nov 2026 and holding it constant:
- Every $100,000 drawn costs about $562 a month in interest ($6,740 a year).
- Once $150,000 has been drawn, interest is about $843 a month.
So early in the build the payment is small and it grows with each draw. This is an illustration only. It does not include fees, a different construction rate, or a rate change during the build.
Costs to check
Because RateSonar did not find an official list of construction loan fees, ask the lender for them in writing. Useful questions:
| Ask about | Why |
|---|---|
| Rate during the build and after | It may differ from a standard home loan |
| Fees for each drawdown or inspection | Fees may apply for each release |
| Interest-only period | When does it stop and the full repayment start |
| Build time limit | What if the build runs late |
| Cost overruns | Who covers them and how the loan limit is set |
| Fixed-price contract | Whether the lender needs one before approval |
| Valuation basis | Is it on the finished home or on the stage |
Mistakes and what to ask
- Paying the builder from your own pocket for stages not done. Pay for completed stages, per your contract, and get the work checked.
- Underestimating the interest while you also pay rent. Add the drawn-balance interest to your rent during the build.
- Not planning for the step-up. Ask what your repayment becomes when the build finishes. Use the interest-only guide to see the step-up arithmetic.
- Skipping the contract check. Before you sign, compare the building contract and the loan terms for dates, variations and what happens if costs rise.
- Not comparing rates. Compare variable and fixed options on the home loan rate board and the variable page.
Check it on RateSonar
- Interest-only home loan ratesAdvertised interest-only loans ranked lowest first, each with its recorded date.
- Home loan ratesEvery advertised home loan, lowest rate first, each with its recorded date.
- Compare lendersUp to five lenders side by side: bars, dots, a table and a head-to-head race.
- Variable home loan ratesAdvertised variable-rate loans ranked lowest first, each with its recorded date.
Common questions
Do I pay interest on the whole construction loan from day one?
It depends on the lender. The Moneysmart pages RateSonar checked do not spell out how a given lender charges, so confirm with yours whether interest runs only on the amount drawn so far, as illustrated above.
What is a progress payment?
A payment made as a stage of the build is finished. Consumer Affairs Victoria lists base, frame, lock-up and fixing as stages and says you pay for completed stages. Your contract sets the amounts.
Does the lender inspect the work?
Lender rules differ, so ask yours whether it requires a valuation or inspection before each release. Separately, you should check the work yourself and consider an independent inspector, as Consumer Affairs Victoria advises.
Can I use an interest-only loan for a build?
Moneysmart says interest-only loans may be useful for short-term borrowing such as a construction loan. The risk is the higher repayment when the interest-only period ends.
Where do I check the builder and contract rules?
Your state or territory's building regulator or consumer affairs office. Victoria's page is linked below. RateSonar has not checked every state, so look up yours.
Sources
- Moneysmart: construction loan (glossary) · page updated 1 October 2019, checked 2 November 2026
- Moneysmart: Interest-only home loans · page updated 29 October 2026, checked 2 November 2026
- Consumer Affairs Victoria: Deposits and payments for building work · page updated 1 July 2026, checked 2 November 2026