In short: Builds stall on finance far more often than on bricks. The usual causes are progress payment claims that do not match the lender's schedule, variations the loan was never sized to cover, building contracts that are not truly fixed price, missing domestic building insurance, and pre-approvals that lapse before the land settles. Each is avoidable with a properly structured construction loan and a contingency held outside it.
Key takeaways
- The lender pays the builder against Victoria's legislated progress schedule; claims outside it get queried and delayed.
- Variations are your cost unless the loan is re-approved to include them, and re-approval takes weeks.
- A "fixed price" contract with large provisional sums is not fixed; read the exclusions.
- Domestic building insurance is compulsory in Victoria for residential building work above the statutory threshold, and it is your protection if the builder fails.
- Your pre-approval has a shelf life; untitled land can outlast it.
Melbourne's northern growth corridor is a construction zone, and our Mickleham office hears the same stories every month: a builder waiting three weeks for a frame-stage payment, a family paying rent and interest on a slab that has not moved, a variation invoice that the lender will not fund.
Mistake 1: not understanding how progress payments actually work
A construction loan is not drawn in full at settlement. The lender releases money in stages as the builder invoices for completed work. In Victoria, the Domestic Building Contracts Act caps the deposit and progress payments for a standard build at 5% deposit, 10% base, 15% frame, 35% lock-up, 25% fixing and 10% completion. Consumer Affairs Victoria publishes the contract rules that builders must follow.
Delays arise when the builder's invoice does not match the stage, when the lender's inspector has not visited, or when you forget that the lender needs you to sign each drawdown request. Some lenders take five to ten business days from receiving a claim to paying it. Tell your builder that timeframe up front and submit claims the day the stage is finished. Our guide to construction loan progress payments explains each stage and what the lender inspects.
Mistake 2: assuming variations will be funded
The loan is approved for the contract price. If you add a butler's pantry for $18,000 halfway through, the lender did not approve that and will not simply add it. Options are to pay the variation from your own funds, or to apply for a loan increase, which means a fresh assessment, a revised valuation and possibly a revised contract. That process takes weeks, during which the builder may stop.
The fix is to finalise selections and upgrades before the contract is signed, and to hold a cash contingency outside the loan. A common rule we use with clients is 5% of the build price. On a $380,000 build that is $19,000 held in an offset account.
Mistake 3: signing a contract that is not really fixed price
Most volume builders in Melbourne's north offer "fixed price" contracts, and most lenders require one. But fixed price only covers what is in the contract. The three things to check:
- Site costs. Is the site cost fixed after a soil test, or is it a provisional allowance that can rise if rock or reactive clay turns up?
- Provisional sums and prime cost items. Allowances for tiles, tapware or electrical fit-out that you can exceed. Every dollar over is a variation.
- Exclusions. Driveway, landscaping, fencing, letterbox, clothesline, flooring and window coverings are often excluded and can add $30,000 to $50,000 that you must fund from savings or a separate loan.
A lender will fund the contract. It will not fund the exclusions unless they are in a separate quoted contract included in the application. Our house and land packages service exists partly to make sure the whole project cost, not just the builder's contract, is in the loan from the start.
Mistake 4: not checking domestic building insurance
Victorian builders must take out domestic building insurance for residential building work above the statutory contract value threshold, and the certificate must be provided before you pay the deposit. The insurance protects you if the builder dies, disappears or becomes insolvent and cannot finish the work or fix defects, up to the policy limit. Lenders require the certificate before the first progress payment and will not release funds without it.
Ask for the certificate, check the builder's name and the contract price on it match your contract, and keep a copy. If a builder is slow to provide it, that is a warning sign in itself. Consumer Affairs Victoria explains the insurance requirements and the Victorian Building Authority licensing checks you should do on any builder.
Mistake 5: letting the pre-approval lapse before land settles
Pre-approvals typically last 90 days. Untitled land in Kalkallo or Donnybrook can take six to eighteen months to title. If the land settlement lands after the pre-approval expires, the lender re-verifies everything at the rates and policies of the day. Rates may be higher, your circumstances may have changed, and the valuation of the land may have moved.
Plan for this. Keep documents current, avoid new debt or job changes, and tell your broker the expected title date so the application can be timed. The process for a lapsed approval is covered in pre-approval expired: what happens now.
Mistake 6: forgetting the cashflow during the build
During construction you pay rent (or your existing mortgage) plus interest-only on the amount drawn. On a $684,000 loan, for illustration at 6.00% p.a., interest-only starts around $1,520 a month after a $304,000 land settlement and rises to about $3,420 a month by completion. Add $2,200 a month of rent and the overlap is substantial for six to nine months. Build this into your budget with the repayment calculator before you commit, and remember that the loan converts to principal and interest at completion, roughly $4,101 a month on that example.
Mistake 7: switching lenders or borrowing more mid-build
Refinancing a partially built home is very difficult; most lenders will not take on a construction loan in progress. A car loan taken during the build can also cut your servicing below what the lender needs for the remaining drawdowns. From land settlement to the final payment, treat your finances as frozen.
Mistake 8: not reading the building contract as a legal document
The building contract is as important as the land contract of sale. Have it reviewed for the commencement and completion timeframes, liquidated damages if the builder is late, the variation process, and what happens if the lender's inspector rejects a stage. For land in a new estate, any building covenant on title also limits what you can build; your conveyancer should flag it in the Section 32.
Pre-signing checklist
| Check | Done |
|---|---|
| Fixed-price contract with site costs fixed after soil test | |
| Provisional sums and prime cost items listed and realistic | |
| Exclusions quoted separately and included in the loan application | |
| Domestic building insurance certificate received | |
| Builder registration verified with the Victorian Building Authority | |
| Contingency of about 5% held outside the loan | |
| Land title date known and matched to pre-approval expiry | |
| Rent-plus-interest cashflow budgeted for the build period | |
| Progress payment schedule and lender turnaround explained to the builder |
Frequently asked questions
Does the lender inspect the build before paying each stage?
Most lenders send a valuer or inspector before releasing the lock-up, fixing and completion payments, and some inspect every stage. The inspection confirms the work claimed has been done. If it has not, the claim is rejected and the builder is told why. This protects you, but it adds a few days to each payment, so factor it in.
What if my builder goes into liquidation?
Stop paying immediately, contact your lender, and lodge a claim under the domestic building insurance policy, which is designed for this situation. The lender will generally pause the loan while a replacement builder is arranged. The process is slow and stressful, which is why the insurance certificate check before you sign is not optional.
Can I include landscaping and a driveway in the construction loan?
Often yes, if they are quoted before the application and the lender includes them in the "as if complete" valuation. Adding them afterwards is a variation and much harder to fund. Get the quotes early.
Is a construction loan more expensive than a normal home loan?
During construction it is usually interest-only on the drawn amount, at a rate similar to a standard variable loan, and it converts to principal and interest at completion. Some lenders charge extra for progress inspections. The construction loans page covers typical features and the house and land vs established guide compares the total cost of building against buying.
Talk to GNT Finance
We structure construction loans for clients building across Melbourne's north and we chase the progress payments so your builder is paid on time. Book a free consultation or call Gorakh Timilsina on 0426 403 703 at our Mickleham office. There is no cost to you for our home-loan service in most cases.
This page is general information only and not legal, tax or financial advice. Laws change — confirm current rules with the State Revenue Office, the ATO or a licensed professional.
Written by Gorakh Timilsina
Founder, CEO & Senior Mortgage Consultant at GNT Finance. Gorakh started as a broker assistant, spent years as a senior credit officer assessing loan applications, and now helps Melbourne families get the right loan approved. English, Nepali and Hindi spoken.