How Construction Loan Settlement Actually Works

Construction loan settlement happens in stages, not in one lump sum like a standard purchase.

Instead of receiving the full loan amount upfront, your lender releases funds progressively as your build reaches predetermined milestones. You'll typically settle on the land first, then draw down additional amounts as the foundation is laid, the frame goes up, the roof goes on, and so on until practical completion. Understanding how this works affects your cash flow planning, particularly if you're building a commercial premises or investment property while still managing other business commitments.

Settlement on the Land Component

When you purchase land through a construction loan, the first settlement mirrors a standard property purchase. Your lender releases the portion of your loan that covers the land price plus associated costs like stamp duty and conveyancing fees. This usually happens 30 to 90 days after you sign the land contract, depending on what you've negotiated with the vendor.

Consider a business owner purchasing a block in Western Sydney for $450,000 to build a commercial workshop. At land settlement, the lender advances $450,000 plus around $18,000 in stamp duty and legal costs. From that point, the owner pays interest only on that drawn amount, not on the full approved loan of $850,000. This distinction matters because you might have six to nine months between land settlement and when construction actually begins, depending on how long council approval takes and builder availability.

The Progressive Drawdown Schedule

After land settlement, your construction funding is released according to a progress payment schedule that matches your building contract. Most fixed price building contracts divide the build into five or six stages: base, frame, lock-up, fixing, practical completion, and final completion. Your lender typically releases funds after their valuer inspects and confirms each stage is complete.

The interval between drawdowns directly impacts your cash flow. In our experience, business owners often underestimate the holding period between stages. Your registered builder submits a claim, the lender arranges a progress inspection, the valuer produces a report, and then the funds are released. This process takes anywhere from seven to fourteen business days. If your builder expects payment within five days of completing a stage and your lender takes twelve days to release funds, you'll need working capital to bridge that gap or negotiate extended payment terms with your builder.

What You Actually Pay During Construction

During the build, you make interest-only repayments on whatever amount has been drawn down to that point. Most lenders also charge a Progressive Drawing Fee each time they release funds, usually between $150 and $400 per drawdown. Over six drawdowns, that adds $900 to $2,400 to your total borrowing costs.

The construction loan interest rate you're charged during the build is often slightly higher than standard variable rates because the lender carries more risk during construction. Some lenders offer a construction to permanent loan structure where the rate automatically converts to a standard home loan rate once the build reaches practical completion. Others require you to formally refinance at that point, which means another application, another valuation, and potentially another round of legals.

Final Settlement and Conversion

Final settlement occurs when your build reaches practical completion and you've received an occupancy certificate from council. Your lender conducts a final valuation to confirm the finished property matches the approved plans and the loan amount. At this point, your loan converts from construction funding to a standard principal and interest loan, unless you've arranged to continue on interest-only repayment options.

This conversion isn't automatic with all lenders. If you've used a land and construction package that requires refinancing at completion, you'll need to reapply and meet the lender's servicing requirements based on current income and expenses. For business owners whose financial position has changed during the build, perhaps due to investing in new equipment through asset finance or expanding operations via commercial loans, this can create complications. Confirming upfront whether your construction finance automatically converts or requires a new application avoids surprises twelve months into your project.

Managing Payment Timing With Contractors

The lag between construction milestones and fund release creates practical challenges when you're coordinating multiple contractors. Your builder might engage separate plumbers and electricians who expect payment shortly after completing their portion of work. Your building contract should specify who pays these subcontractors and when.

Under a cost plus contract, you typically pay subcontractors directly as invoices arrive, which means you need access to funds before the lender releases the next drawdown. Under fixed price contracts, your builder manages all payments to subcontractors and you simply pay the builder according to the agreed schedule. The second arrangement creates less cash flow volatility, but you'll pay a premium for that certainty built into the builder's margin.

Most lenders require you to commence building within a set period from the Disclosure Date, usually six to twelve months. If council plans take longer than expected or your builder pushes back the start date, you might breach this condition and need to renegotiate your approval. Staying in regular contact with both your builder and your broker during the approval period helps you manage these timelines and adjust if delays emerge.

Call one of our team or book an appointment at a time that works for you. We'll walk through how the settlement timing on your specific project affects your cash position and help you structure drawdowns that align with your builder's payment schedule.

Frequently Asked Questions