How construction loans work

Building a home – or undertaking a major structural renovation project – can challenge even the best-laid plans. But our construction loans (also known as building loans) take a lot of stress out of the equation. Let’s look at how they work.

What is progressive drawdown?

You know what construction loans are and how they can help you navigate cashflow challenges of big projects; it's time to understand progressive drawdown. By allowing you to draw on your construction loan bit by bit as needed – known as ‘progressive drawdown’ – your interest payments are lower than if you borrowed the whole amount upfront. A progressive drawdown – or progress payment – is the portion of your loan funds we release at each stage of construction.

We’ll pay your builder direct at each stage of the build (assuming you’ve met our requirements). Among other things, we’ll need to see the builder’s invoices as well as a progress claim certificate.

Paying interest-only on your loan

Our construction loans are designed to ensure you don’t draw more than you need – or exceed the construction costs you’ve budgeted for.

That’s why our loans begin with an interest-only period. This means you’ll be paying interest-only – and only on the amount you’ve drawn down.

What’s special about a construction loan

Our construction loan is a standard home loan – with additional building conditions.

So what’s the difference? Let’s look at two $500,000 loans – one standard, one construction – to see how it works.

If you have a standard home loan – without building conditions – you must draw down the total loan by a certain time. The full $500,000. That means you’re paying interest on the whole loan amount – all $500,000 – from the start.

But if you have a construction loan for $500,000, then you draw down what you need in instalments, to cover the costs of each part of the project. If your first invoice from the builder is for, say, $50,000, then that’s what you draw down. That’s what you pay interest on. You only pay interest on the rest when you draw it down later in the project.

But remember you'll also pay loan interest on any fees and charges debited to your loan account.

One more thing. We need the paperwork in order (all invoices etc.) before we release each progress payment. Our brochure Your Guide to Building and Renovating (PDF, 257KB), opens in new window has more information.

Inspections and valuations

Before you start building, we’ll need an ‘as if complete’ valuation – an estimate of the market value of the land and proposed building/renovation.

We also require further inspections and valuations through the project to be sure everything’s on track and within budget.

Cost overruns

Cost overruns are when the building expenses exceed the planned progressive payments we agreed to at the start of your loan. We understand this sometimes happens. You might change your cladding from timber to brick. You might opt for wooden joinery instead of aluminium. Or you might simply decide you want double powerpoints instead of single ones.

If you exceed the amount we agreed upon, talk to us ASAP about next steps. If we can’t provide additional funding, you’ll need to cover the extra cost yourself.

Your final payment

Once your work is done, we’ll need some last bits of paperwork before we release the final portion of money. Our brochure Your Guide to Building and Renovating  (PDF, 257KB), opens in new window has the details.

Once the interest-only period of your loan ends, your loan becomes principal and interest. If you finish building before then, you can change the loan over to principal and interest. You’ll need to contact us to do that.

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The information contained in this article is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, NAB recommends that you consider whether it is appropriate for your circumstances. NAB recommends that you seek independent legal, financial and taxation advice before acting on any information in this article.