Construction Loan Settlement: Key Steps to Know

Understanding Construction Loan Settlement

When you're ready to build your dream home in Narre Warren, understanding the construction loan settlement process is crucial to ensuring your project runs smoothly. Unlike traditional home loans where you receive the full loan amount upfront, construction finance works through a progressive drawdown system that releases funds in instalments as your building project reaches specific milestones.

Construction loan settlement refers to the entire process of accessing your construction funding through a series of progress payments. This approach protects both you and your lender by ensuring funds are only released when work has been completed to an acceptable standard.

How Construction Loan Settlements Work

The settlement process for construction loans differs significantly from standard mortgage settlements. Instead of receiving the full loan amount on a single settlement date, you'll access funds through multiple progress payments aligned with your construction draw schedule.

Here's what typically happens:

1. Initial Deposit: You'll usually need to provide a deposit to your registered builder before work begins
2. Progressive Drawdown: Funds are released in stages as construction reaches predetermined milestones
3. Progress Inspection: Each drawdown requires an inspection to verify the work completed
4. Final Settlement: The remaining funds are released once construction is complete and final approval is obtained

One significant advantage of this structure is that you only charge interest on the amount drawn down, rather than the entire loan amount from day one. This can result in substantial savings during the construction period.

The Construction Draw Schedule

Your construction draw schedule outlines when and how much money will be released throughout your building project. Most lenders work with a standard progress payment schedule that includes these typical stages:

• Base or slab completion
• Frame stage
• Lockup (roof, windows, and external doors completed)
• Fixing stage (internal fit-out)
• Practical completion

Each bank and lender may have slightly different requirements, but the principle remains consistent. Before each payment is released, a progress inspection is conducted to ensure work meets quality construction standards and aligns with council plans.

Types of Building Contracts

The type of building contract you choose will influence your construction loan application and settlement process. Two main contract types are common:

Fixed Price Building Contract: This provides certainty around costs, with your registered builder agreeing to complete the work for a set price. Most lenders prefer fixed price contracts as they reduce financial risk. Your progress payment schedule is clearly defined from the outset.

Cost Plus Contract: Less common for residential construction, this contract type charges for actual costs plus a margin. These typically require more detailed documentation and may attract higher scrutiny during the construction loan application process.

Understanding Fees and Interest Rates

When budgeting for your new home construction finance, factor in these common costs:

• Construction Loan Interest Rate: Typically variable during the construction phase, with the option to fix once construction completes
• Progressive Drawing Fee: Charged each time funds are released (usually between $300-$500 per draw)
• Progress Inspection Fees: Covering the cost of valuers or building inspectors
• Development Application and Council Approval Fees: Required before construction begins

Many construction to permanent loan products offer interest-only repayment options during the building phase. This means you're only paying interest on the funds drawn down, keeping your repayments manageable while construction is underway.

Requirements for Construction Loan Settlement

To access construction loan options from banks and lenders across Australia, you'll need to satisfy several requirements:

Documentation for Initial Approval:

• Fixed price building contract with a registered builder
• Suitable land ownership or land and construction package
• Council approval and building permits
• Detailed building plans and specifications
• Proof you can commence building within a set period from the Disclosure Date (usually 6-12 months)

For Each Progress Payment:

• Builder's invoice matching the progress payment finance stage
• Progress inspection report confirming work completion
• Evidence that sub-contractors, plumbers, and electricians have been paid

If you're undertaking owner builder finance, expect additional scrutiny. Lenders view these projects as higher risk and may require more detailed documentation and larger deposits.

Specialist Construction Finance Options

Different building projects require different financing approaches. At Cairncross Group Capital, we help Narre Warren clients access appropriate funding for:

• House & Land Packages: Combined land and build loan products
• Custom Home Finance: For those pursuing custom design projects
• House Renovation Loan: Converting existing properties to your dream home
• Home Improvement Loan: Smaller-scale renovation projects
• Spec Home Finance: For builders constructing properties for sale
• Off the Plan Finance: Purchasing properties before construction completes
• Project Home Loan: Standardised designs from volume builders

Each option has distinct requirements around the loan amount, deposit, and settlement process.

Managing Your Construction Settlement

Successful construction loan settlement requires careful coordination between multiple parties:

• Your mortgage broker
• The lender's construction team
• Your registered builder
• The valuer or building inspector
• Your solicitor or conveyancer

Communication is vital. Ensure your builder provides adequate notice before requesting each drawdown, allowing time for inspections and processing. Most lenders require 5-10 business days to process each progress payment once inspection reports are received.

Maintain clear records of all correspondence, invoices, and inspection reports. This documentation becomes crucial if any disputes arise or if you need to adjust the progress payment schedule due to construction delays.

Planning for Additional Payments

While your construction draw schedule outlines standard progress payments, you may need to budget for additional payments that fall outside the regular schedule. These might include:

• Landscaping and driveway completion
• Special fixtures or fittings not included in the base contract
• Variations to the original building plans
• Cost overruns (typically requiring your own funds)

Discuss with your renovation finance & mortgage broker how to structure your building new home finance to accommodate potential variations while maintaining sufficient contingency funds.

Converting to a Standard Home Loan

Once construction reaches practical completion and you receive council approval for occupancy, your construction to permanent loan converts to a standard home loan. This is the final settlement stage.

At this point, you can:

• Choose between variable and fixed interest rate options
• Move from interest-only repayment options to principal and interest
• Consolidate any additional payments into the final loan amount
• Refinance if better options are available

This conversion is usually automatic, but confirm the process with your lender and mortgage broker to ensure a smooth transition.

Building your new home in Narre Warren is an exciting journey. Understanding construction loan settlement processes helps you manage the financial aspects with confidence, allowing you to focus on creating the home you've envisioned. Working with experienced professionals who understand both construction finance and the local market ensures your project proceeds smoothly from land purchase through to moving in.

Call one of our team or book an appointment at a time that works for you to discuss your construction finance needs.