In short: A construction loan is released in stages as your builder completes each part of the home, and you pay interest only on the amount drawn so far. In Victoria the standard stages under a domestic building contract are deposit 5%, base 10%, frame 15%, lock-up 35%, fixing 25% and completion 10%. Once the final payment is made the loan converts to normal principal and interest repayments.
Building in Melbourne's growth corridors, whether a house-and-land package in Donnybrook or a knock-down rebuild in Reservoir, means dealing with a loan that behaves differently from a standard mortgage for six to twelve months. This guide explains the progress payment schedule, what you pay during the build, what the lender needs at each stage, and the budget traps that catch first-time builders.
How a construction loan works
- Land first. You settle the land with the first part of the loan (or you already own it).
- Fixed-price building contract. The lender values the finished home "as if complete" using the contract, plans and specifications.
- Approval for the full amount. Land plus build is approved as one loan, but only the land portion is advanced at the start.
- Progress draws. Each time the builder finishes a stage and invoices you, the lender inspects (or reviews photos and certificates) and pays the builder directly.
- Interest-only during the build. You pay interest on the drawn balance only, usually monthly.
- Completion. After the final invoice, occupancy certificate and final inspection, the loan converts to principal and interest over the remaining term.
Our construction loans page covers lender products; this guide focuses on the mechanics.
The Victorian progress payment stages
Victoria's Domestic Building Contracts Act sets maximum progress payments for standard contracts. Most HIA and Master Builders contracts follow these percentages. For a $350,000 build:
| Stage | What is complete | Maximum percentage | Amount on a $350,000 build |
|---|---|---|---|
| Deposit | Contract signed, before work starts | 5% | $17,500 |
| Base | Footings and slab (or stumps and bearers) | 10% | $35,000 |
| Frame | Wall and roof framing, approved by the building surveyor | 15% | $52,500 |
| Lock-up | External walls, roof, windows and doors; the house is secure | 35% | $122,500 |
| Fixing | Internal cladding, architraves, skirting, doors, cupboards, plumbing and electrical fit-off | 25% | $87,500 |
| Completion | Practical completion; occupancy certificate issued | 10% | $35,000 |
A builder cannot demand more than these percentages at each stage under a standard contract. If yours is asking for 20% at base or a larger upfront deposit, ask why; Consumer Affairs Victoria's building guidance is at consumer.vic.gov.au.
Worked example: Donnybrook house-and-land package
Ramesh and Anju buy a $330,000 block in Donnybrook and sign a $350,000 fixed-price contract. Total package $680,000. They contribute 10% ($68,000) plus costs, and the lender approves a $612,000 loan at 90% LVR with LMI capitalised.
Upfront costs
| Item | Amount |
|---|---|
| Land deposit and build contribution (10% of $680,000) | $68,000 |
| Stamp duty on the land only (VIC general rate: $2,870 + 6% of $200,000) | $14,870 |
| Conveyancing, registration, lender fees | approx. $3,000 |
| Cash at the start | approx. $85,870 |
Duty is charged on the land value only, because the house does not exist when the land contract is signed. That is one of the main financial advantages of house-and-land over an established home; see house and land versus established. If Ramesh and Anju were first-home buyers, the duty on a $330,000 block would be exempt (under $600,000), and the $10,000 First Home Owner Grant would apply because the finished home is new and the total package is under $750,000. The stamp duty calculator and First Home Owner Grant guide cover both.
Draws and interest during the build
The borrower's own contribution is used first at each step, then the lender funds the rest. Interest shown for illustration at 6.00% p.a., interest-only on the drawn balance.
| Point in time | Paid this stage | Cumulative loan drawn | Monthly interest |
|---|---|---|---|
| Land settlement (month 0) | Lender $297,000 (borrowers paid $33,000) | $297,000 | $1,485 |
| Deposit and base (month 2) | Borrowers $35,000, lender $17,500 | $314,500 | $1,573 |
| Frame (month 4) | Lender $52,500 | $367,000 | $1,835 |
| Lock-up (month 6) | Lender $122,500 | $489,500 | $2,448 |
| Fixing (month 8) | Lender $87,500 | $577,000 | $2,885 |
| Completion (month 10) | Lender $35,000 | $612,000 | $3,060 |
| After completion | Loan converts to principal and interest | $612,000 | approx. $3,669 |
Across the ten-month build Ramesh and Anju pay roughly $21,000 in interest while still paying rent. Budget for it. Some lenders allow interest to be capitalised during construction, which keeps cash free but increases the loan. Model the finished repayment in the mortgage repayment calculator and the whole picture in the upfront costs calculator.
What the lender needs
Before approval
- Signed fixed-price building contract (HIA or Master Builders standard form is preferred)
- Council-approved plans and specifications
- Building permit (or evidence it is in progress)
- Builder's registration and domestic building insurance certificate (compulsory in Victoria for work over $16,000)
- Soil report and site costs, either fixed in the contract or itemised
- Evidence of your contribution and genuine savings
At each stage
- Builder's invoice for the stage
- Progress inspection by the lender's valuer or a photo report (lender-dependent)
- Building surveyor's stage approval where relevant (frame, final)
- Occupancy certificate and final invoice at completion
Draws normally take five to ten business days from invoice to payment. Builders charge interest on late stage payments under most contracts, so send invoices to your broker or lender the day you receive them.
Variations and items the loan does not fund
A construction loan funds the fixed-price contract. Anything outside it is usually yours to pay in cash:
- Landscaping, driveway, fencing, letterbox and clothesline (often excluded or "allowances" only)
- Window coverings, light fittings beyond the standard, air conditioning upgrades
- Site cost overruns where the contract has provisional sums rather than fixed site costs
- Variations you request after signing (a bigger alfresco, stone benchtops)
Some lenders will include post-completion items if quoted upfront; most will not. Growth-corridor estates in Donnybrook and Kalkallo also have design guidelines that may require front landscaping and fencing within a set period, so those costs are real.
Timelines, delays and the build period
Lenders give you a fixed window (commonly 12 months from approval, sometimes 24) to reach completion. Weather, trade shortages and supply delays can push a ten-month build to fourteen. If the window is about to lapse, ask for an extension before it expires; a lapsed approval means reapplying under current policy, and if your circumstances have changed the answer may differ.
If a builder becomes insolvent mid-build, the domestic building insurance policy covers completion costs up to its limit (for illustration, up to $300,000 in Victoria at the time of writing) and the lender pauses draws until a replacement builder is engaged. Keep every certificate and receipt.
Valuation shortfall risk
The lender values the finished home based on contract plus land. In a soft market or with an over-specified build, the valuation can come in below the total cost. If land plus build is $680,000 but the valuer says $650,000, the lender lends against $650,000 and you fund the difference. Buying land and signing a build contract at the same time, before finance is approved, is how people discover this too late. Read contract of sale in Victoria and make both contracts subject to finance.
Construction loan checklist
- Get finance approval for land plus build before signing either contract, or make both subject to finance.
- Insist on a fixed-price contract with fixed site costs.
- Confirm the builder's registration and domestic building insurance.
- Check the progress payment schedule against the Victorian maximums.
- Budget interest during the build plus rent, plus a $10,000–$15,000 buffer.
- List every item not in the contract and price it.
- Confirm the lender's build period and what an extension costs.
- Send each invoice to the lender immediately.
- Inspect at frame and pre-plaster yourself, or hire an independent inspector; see building and pest inspection rights.
- Obtain the occupancy certificate before the final draw.
Common mistakes
- Unbudgeted site costs. Rock, fill and sloping blocks in the northern corridor add $10,000–$40,000 when site costs are provisional.
- Signing before finance approval, then facing a valuation shortfall with no exit.
- Paying the builder directly and expecting the lender to reimburse. Draws go builder-direct; paying yourself first only works if you have told the lender.
- Choosing upgrades after approval with no cash to pay for them.
- Running out of buffer because interest during the build was never in the budget.
- Letting the build window lapse and having to reapply.
Frequently asked questions
How do progress payments work on a construction loan?
Your lender pays the builder in instalments as each stage is completed and invoiced, rather than paying the whole contract upfront. In Victoria the standard stages are deposit 5%, base 10%, frame 15%, lock-up 35%, fixing 25% and completion 10%. The lender inspects or reviews evidence before each payment, and you pay interest only on the total drawn so far.
Do you pay interest during construction?
Yes, but only on the amount drawn to date, and usually on an interest-only basis. Early in the build, when only the land is funded, the interest is modest; it rises with each stage. On a $612,000 loan drawn over ten months the interest during construction is roughly $21,000 for illustration at 6.00% p.a. Some lenders let you capitalise it into the loan.
What deposit do I need for a construction loan?
The same LVR rules as a standard loan apply to the combined land and build cost: 5% with LMI at some lenders, 10% commonly, 20% to avoid LMI. On a $680,000 house-and-land package that is $34,000 to $136,000, plus stamp duty on the land and costs. Eligible first-home buyers can use the First Home Guarantee for a new build.
Can I get the First Home Owner Grant for a house and land package?
Yes. The Victorian FHOG is $10,000 for a new home valued up to $750,000, and a house-and-land package qualifies because the home has never been occupied. The grant is normally paid at the base stage when the lender applies on your behalf. You must live in the home for 12 continuous months starting within 12 months of completion.
What if my builder goes bankrupt?
Domestic building insurance, which your builder must hold for contracts over $16,000 in Victoria, covers loss caused by the builder's death, disappearance or insolvency, up to the policy limit. Your lender will pause progress payments, you engage a replacement builder, and the insurer contributes to the cost of completion. Keep the insurance certificate with your loan documents.
How long does a construction loan last?
The construction phase typically runs six to twelve months, and lenders set a build window of 12 to 24 months from approval. Once the final progress payment is made the loan converts to a standard principal and interest home loan for the remaining term, usually 30 years from the original approval date. If the build runs long, request an extension before the window lapses.
Talk to GNT Finance
GNT Finance arranges construction and house-and-land package loans across Melbourne's north, including Donnybrook and Kalkallo, and manages each progress draw with the lender so your builder is paid on time. Gorakh Timilsina's years as a senior credit officer mean the contract, plans and insurances are checked before the lender sees them. Book a free consultation or call 0426 403 703; 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.