What is progressive drawdown in construction loans?

If you’re thinking of building a home, you might need a loan to do so. That's where construction loans come in.

Construction loans differ greatly to a normal home loan thanks to something called progressive drawdown.

Check out our guide on how construction loans work:

What is a construction loan?

A construction loan is a specific type of home loan designed to assist the funding of a new home’s construction. Getting a loan for a home that doesn’t exist yet can be a bit trickier, so a construction loan works in conjunction with the building process and helps you pay for it. 

Construction loan interest rates are typically higher than standard home loans, as it's harder for a lender to value a home that doesn't exist yet, raising the level of risk. Additionally, they tend to have higher valuation fees, as the lender has to do a valuation at each stage of the construction process.

How does a construction loan work?

Construction loans function very differently to a standard home loan. They typically charge interest-only repayments for the duration of the build, which is usually set at 12 months.

This is to keep your repayments to a minimum during construction, before reverting to a principal and interest loan at the end, known as the ‘end loan’. 

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

How does progressive drawdown work?

A loan drawdown process typically consists of five or six stages:

This is a rough example and should be taken as such. If one of these stages (such as the base) costs $100,000, then for the duration of that stage you’ll only be charged interest on that $100,000.

If you then draw down an extra $100,000 to pay the builder for the next stage (the frame), your repayments will now be based on the interest costs of $200,000. So essentially, funds from your approved loan amount are only charged interest as they are paid to the builder (drawn down).

Benefits of progressive drawdowns

• Funding your home build this way can help reduce the risk of financial loss by only borrowing small amounts at a time as opposed to the entire lump-sum. 
• The segmented loan structure keeps your interest repayments lower than the interest accumulated on the full loan balance 

Other factors to keep in mind 

• Construction loans can require a higher loan-to-value ratio, which may mean you'll need a bigger deposit 
• Lenders are required to assess that the work at each stage has been completed before releasing the next stage of funds

Other helpful resources: 

• Borrowing power calculator
• Home loan repayment calculator
• How much does it cost to build your own house 

How to apply for a construction loan

View our low-rate construction loans.

Our construction loan is perfect for building a home or if you're looking to make extensive renovations to your existing property.

To apply you’ll need to have:

• Finalised the purchase of your land

• Selected a licensed Master Builder

• Building plans

• Copy of the fixed HIA/MBA Building contract

The building contract needs to be a fixed price contract so cost of each building stage is preset. This ensures no hidden costs are incurred during construction that could complicate the finance arrangements.

If you need help or have more questions about our construction loan, talk to one of our friendly lending specialists today on 13 10 90.

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