Do you know how construction loan rates are calculated?

Construction loan rates aren't quoted the same way as standard home loan rates.

Lenders advertise a headline rate, but you only pay interest on the amount drawn down at each stage of your build. That means your actual interest cost builds progressively as the project moves from slab to frame to lockup, rather than applying to the full loan amount from day one. The distinction matters because it changes how you budget for the construction period and what you need to set aside for repayments before the build is complete.

How lenders price construction finance

Construction loan interest rates are typically priced 0.25% to 0.50% higher than a standard variable home loan from the same lender. The margin reflects the additional administration involved in managing progressive drawdowns, arranging progress inspections, and coordinating payment to your registered builder according to the progress payment schedule. Some lenders offer interest-only repayment options during the construction period, which means you're only servicing the interest on funds drawn to date rather than paying down principal before you move in.

In our experience, clients building in The Basin often secure land first and then arrange construction finance as a land and construction package once council approval is confirmed. The Basin sits within the City of Knox, where development applications for a standard single dwelling on suitable land typically take 60 to 90 days to process, assuming no major planning overlays apply. Once council plans are stamped, you'll generally need to commence building within a set period from the disclosure date, usually six to twelve months depending on your lender's policy.

Interest is only charged on the amount drawn down

Consider a client arranging construction funding for a custom design on a sloping block near Columbine Drive. The total loan amount is set at the full land cost plus the fixed price building contract, but the lender only releases funds in instalments tied to the progress payment schedule. At base stage, the builder invoices for 15% of the contract value and the lender draws down that portion. Interest starts accruing on that 15% only. At frame stage, another 25% is drawn, and interest now applies to the cumulative 40%. By lockup, around 60% of the construction funding has been released, and that's the amount on which interest is calculated each month.

This progressive drawdown structure means your interest cost during construction is lower than if the full loan amount were advanced upfront. It also means your repayments increase at each stage as more funds are drawn. Budgeting for this requires you to calculate interest on the expected drawn balance at each stage, not on the final loan amount, and to confirm with your lender whether any progressive drawing fee applies per drawdown or whether those costs are bundled into the interest rate.

Fixed price contracts and the rate you lock

Most lenders require a fixed price building contract with a registered builder before they'll approve construction finance. A cost plus contract, where the builder invoices for materials and labour as incurred, introduces uncertainty around the final loan amount and is generally only accepted for owner builder finance or spec home projects where the borrower has commercial building experience. For a standard custom home or project home build in The Basin, the lender will want to see a signed fixed price contract, council approval, and evidence that the builder holds current registration and insurance.

If you're locking in a fixed rate for the construction period, that rate applies only to the funds drawn at the time of lock. Some lenders offer a split structure where the amount drawn during construction sits on a variable rate and converts to fixed once the build is complete and you move to principal and interest repayments. Others allow you to fix the full approved loan amount from the start, but you'll be paying the fixed rate on the entire balance even though only a portion has been drawn, which increases your interest cost during construction without any benefit. Clarifying this structure with your lender at application stage is essential, particularly if rates are rising and you're trying to lock in certainty.

What you'll actually pay during the build

During construction, most borrowers are on interest-only repayments. The monthly repayment amount increases each time a progress payment is made and a new drawdown is released. At base stage, with 15% of the construction funding drawn, your monthly interest cost might be a few hundred dollars depending on the contract value. By practical completion, with 95% drawn, you're servicing interest on nearly the full loan amount, and that repayment will be close to what you'd pay once the loan converts to principal and interest after settlement.

The other cost to factor in is the progressive drawing fee, sometimes called a progress payment fee or inspection fee. Lenders typically charge between $200 and $400 per drawdown to cover the cost of engaging a valuer or inspector to confirm the stage is complete before releasing funds to pay sub-contractors, plumbers, and electricians. Over a standard five or six stage build, those fees add up to $1,000 to $2,400 in total. Some lenders waive the fee if you're borrowing above a certain threshold or if the construction loan is part of a refinance where you're moving other lending across at the same time. It's worth asking.

Why construction loan rates differ between lenders

Not all lenders offer construction finance, and those that do price it differently depending on their appetite for progress payment finance and their serviceability assessment of interest-only loans. The major banks generally have the lowest advertised construction loan interest rates, but their appetite for land and build loans can tighten quickly when credit policy changes or when they're managing portfolio concentration in new home construction. Regional lenders and non-bank lenders often have more flexible construction draw schedules and will consider house and land packages or house renovation loan scenarios that the majors won't touch, but the rate is usually 0.10% to 0.30% higher to reflect that flexibility.

If you're arranging new home construction finance in The Basin and comparing offers, the headline rate is only part of the picture. The progressive payment schedule, the fee per drawdown, whether the rate is variable or fixed, and whether you're forced onto interest-only during construction or can make additional payments all affect the total cost. Access to construction loan options from banks and lenders across Australia means you're not limited to one credit policy or one set of fees, but it does mean the comparison process takes longer than a standard home loan.

Call one of our team or book an appointment at a time that works for you. We'll walk through the construction draw schedule, calculate your repayments at each stage, and make sure the rate and structure fit the build timeline and your cash flow between now and practical completion.

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