When you're looking at construction loans as a property investor, understanding how settlement works is crucial. Unlike traditional home loans where you receive the full loan amount upfront, construction loans operate on a progressive drawdown system that aligns with your building project's milestones.
What Makes Construction Loan Settlement Different?
Construction loan settlement isn't a single event – it's a series of payments made throughout your building project. As a Finance & Mortgage Broker, Premium Finance Group Australia can access Construction Loan options from banks and lenders across Australia, each with their own settlement processes.
The key difference is that lenders only charge interest on the amount drawn down, not the full loan amount. This means you're not paying interest on funds you haven't used yet, which can result in significant savings during the construction phase.
The Progressive Payment Schedule Process
Your construction loan settlement revolves around a Progressive Payment Schedule that's agreed upon before construction begins. Here's how it typically works:
- Initial Settlement: You'll receive the first payment to purchase suitable land or pay initial construction costs
- Stage Payments: Funds are released as construction milestones are reached
- Final Settlement: The remaining loan amount is paid when construction is complete
Each payment requires verification that work has been completed to the required standard. Your lender will arrange inspections at various stages of the project before releasing funds.
Understanding Construction Milestones and Payments
Lenders structure payments around specific construction milestones. Common stages include:
• Foundation and slab completion
• Frame and roof installation
• Lock-up stage (walls, windows, doors)
• Fixing stage (plumbing, electrical, internal work)
• Completion and handover
At each stage, you'll need to demonstrate that your registered builder, plumbers, electricians, and other contractors have completed their work according to council plans and permits. This ensures funds are used appropriately and construction progresses as planned.
The 'As If Complete' Valuation Factor
Most construction loans are based on an 'as if complete' valuation rather than the current land value. This valuation estimates what your property will be worth once construction is finished. The loan amount is typically calculated as a percentage of this completed value, giving you access to the funds needed for your project.
Managing Interest During Construction
One of the advantages of construction loans is the interest-only repayment options during the building phase. You'll only pay interest on funds that have been drawn down, and instalments remain manageable while your property generates no rental income.
However, be aware that applying for a loan includes Progressive Drawing Fees. Each time funds are released, lenders typically charge a fee to cover administration and inspection costs. These fees should be factored into your overall project budget.
What You Need Before Settlement Begins
Successful construction loan settlement requires thorough preparation:
Documentation Requirements:
• Council-approved plans and permits
• Fixed price contracts with your registered builder
• Development application approvals
• Evidence of suitable insurance coverage
Project Planning:
• Detailed construction timeline
• Identification of any Out of Contract Items not included in the main build
• Contingency planning for potential delays or additional payments
Timeline Considerations for Property Investors
Most construction loans require you to commence building within a set period from the Disclosure Date. This timeline varies between lenders but is typically 6-12 months. Having your plans, permits, and registered builder organised before loan approval helps avoid delays.
Whether you're planning major home renovations, buying off the plan, or need to demolish existing property for a new build, understanding these timelines helps you make a plan that works within lender requirements and council restrictions.
Different Project Types and Settlement Variations
Construction loan settlement can vary depending on your project type:
New Builds: Full progressive payment structure with multiple inspection points
House & Land Packages: Often streamlined with predetermined payment stages
Major Renovations: May function similar to a home improvement loan with modified inspection requirements
Off-the-Plan Purchases: Settlement timing depends on developer milestones rather than your own construction schedule
Working with the Right Finance Partner
The streamlined application process and settlement experience largely depends on working with experienced professionals who understand construction finance. Different lenders have varying approaches to progressive payments, interest rates, and settlement procedures.
Premium Finance Group Australia works with property investors to identify suitable construction loan options that align with project timelines and budget requirements. Understanding council regulations, suitable land requirements, and lender preferences helps ensure smooth settlement processes throughout your build.
Construction loan settlement doesn't have to be overwhelming when you understand the process and work with the right team. From identifying your ideal location and price range through to final completion, having proper support makes the difference between a successful project and costly delays.
Call one of our team or book an appointment at a time that works for you to discuss how construction loan settlement can support your next property investment project.
