How the bank actually pays
Most owners assume the construction loan works like a savings account — money in, builder paid, build progresses. It does not. The construction loan is a staged drawdown facility where the bank releases funds at five or six pre-defined milestones, against a quantity surveyor's valuation of work-in-place at each stage.
Missing one milestone, getting the documentation wrong on one drawdown, or accepting a builder's progress claim that doesn't match the bank's valuation — any of these can stall the build for 3–6 weeks while paperwork gets re-cut. Three to six weeks of delay on a construction loan with a $15k–$25k monthly interest cost is real money walking out the door for nothing.
The standard NSW residential construction loan stages
Most major banks use the same six-stage progression matched to the NSW HBL standard contract:
Stage 1 — Deposit (5% of contract sum). Released at contract signature, pre-build. Funds the builder's preliminary works, design finalisation, council fee lodgement.
Stage 2 — Slab/Base (10–15%). Released after slab pour, on QS confirmation that slab is poured, cured and certified by structural engineer. Document required: slab inspection certificate from engineer.
Stage 3 — Frame (15–20%). Released after timber/steel frame is structurally complete and frame inspection has passed. Document required: frame inspection certificate (issued by either certifier or engineer).
Stage 4 — Lock-up/Enclosed (20–25%). Released after roof, external walls, windows and external doors are all installed and the building is weather-tight. Document required: QS site inspection valuation. This is the stage most often disputed.
Stage 5 — Fixing/Fit-out (20–25%). Released after internal linings, cabinetry, tiling and electrical/plumbing rough-in are complete. Document required: progress invoice from builder plus QS valuation.
Stage 6 — Completion (10–15%). Released after final inspections, occupation certificate and handover. Document required: occupation certificate, defect inspection report and final builder invoice.
The percentages must add to 100%. They are agreed at loan setup and bound into the loan documents. Renegotiating mid-build is hard.
The four traps that catch owners
Trap 1: builder progress claims that exceed bank stage values. The builder invoices $180k for 'enclosed stage'. The bank's QS values that stage at $145k under the loan structure. Gap: $35k. The owner pays the gap from cash, or the build halts. The fix: align the builder's payment schedule with the bank's loan stages exactly at contract signature. Both documents — the building contract and the loan offer — must show the same stage names, same percentages and same milestones. Get this wrong at signature and you fight it the whole build.
Trap 2: variations not tracked against drawdown stages. Mid-build variations ($45k for a kitchen upgrade, $15k for an extra ducted reverse cycle, $22k for landscape upgrades) become unfunded gaps because the loan was sized to the original contract. The bank will not extend the construction loan mid-build except in narrow circumstances. The fix: pre-fund all expected variations into the original loan size. Carry a $30k–$80k buffer.
Trap 3: site-cost variations from soil class change. Discussed in our reactive clay article — soil reports coming back H2 or E push footing costs $25k–$60k above the original contract. Most owners haven't pre-funded this in the loan. The fix: condition the loan offer on a soil-tested footing quote, then size the loan including that quote.
Trap 4: timing of QS attendance. The bank's QS attends only after the builder lodges the progress claim. The QS attendance can take 5–14 business days. The drawdown then takes another 5–10 business days for processing. Two-and-a-half to three weeks from claim lodgement to funds in builder's account — meaning the builder is funding labour and materials out of their own working capital during that period. Builders with thin balance sheets stall mid-stage waiting for cash. The fix: pre-arrange a builder cashflow letter at contract setup, confirming the builder's capacity to absorb the lag.
Interest-only vs principal-and-interest during construction
Almost every NSW construction loan is interest-only during the build period — typically 12–18 months — converting to principal-and-interest after handover. Interest is calculated only on funds drawn, not on the total loan amount.
On a $1.0m loan with $400k drawn at frame stage, monthly interest at 6.5% is approximately $2,170. At enclosed stage with $650k drawn, monthly interest is approximately $3,520. At completion with $1.0m drawn, monthly interest is approximately $5,420. Plan the household budget against the actual progression, not against the final number — early-stage interest is much lower, so most cash strain happens in the back half of the build.
A realistic 14-month build on a $1.0m construction loan accumulates $42,000–$58,000 in interest charges across the build period, depending on cash flow timing. Factor this into your project budget — it is not optional, and it is not absorbed by the builder.
Pre-loan checklist
Before signing the loan offer:
1. Match loan stages to building contract stages exactly. Same names, same percentages, same milestones. 2. Confirm QS attendance turnaround time with the bank (5–14 business days standard) and confirm the builder can absorb that cashflow lag. 3. Pre-fund a $30k–$80k variation buffer into the loan size. 4. Pre-fund the soil-tested footing cost, not a vague allowance. 5. Confirm the loan covers all council fees, contributions and certifier fees — these are commonly excluded. 6. Check the construction interest cap — many banks will halt drawdowns if interest accrues beyond a set threshold relative to drawdown. 7. Check the build period clause — most loans require completion within 12–18 months. Beyond that period the loan auto-converts to P&I, requiring you to refinance the half-built site, which is hard.
For a free pre-loan walk on a contract you've already received plus a draft loan offer, call 0476 300 300 or visit /advisory/development-feasibility. The hour we spend reading both documents in parallel routinely saves owners $40k–$120k in mid-build cashflow disasters.
