Do you know how Construction Loan Structures work?

Construction finance works differently from standard home loans because the lender releases funds in stages as your build progresses.

If you're a St John Ambulance employee looking to build, the structure you choose affects how much you pay in fees, how often inspections happen, and how much flexibility you have if your builder needs payment outside the usual schedule. We work with ambulance workers who want to understand exactly how their money flows during a build, not just what their final repayment will be.

Progressive Drawdown: Paying Only for What's Built

You only pay interest on the amount drawn down at each stage of construction. This means you're not paying interest on the full loan amount from day one, which is different from a standard home loan where interest starts immediately on the entire balance.

Consider a St John Ambulance paramedic building a custom home. At the slab stage, the lender releases the first payment of around 15% of the construction loan amount. Interest charges begin only on that portion, not the full amount approved. As the frame goes up and the second drawdown is released, interest is calculated on the combined amount drawn so far. This continues through each stage until practical completion.

Most lenders charge a Progressive Drawing Fee, typically between $200 and $400 per inspection. Some lenders cap this at five or six inspections, while others charge per visit regardless of how many stages your builder requires. If your builder works on a progress payment schedule that includes more stages than the lender's standard structure, you'll either pay extra inspection fees or negotiate a schedule that aligns with your lender's drawdown stages.

Fixed Price Contracts vs Cost Plus Structures

A fixed price building contract gives you certainty over the final amount and makes the construction loan application more straightforward because the lender knows exactly what they're funding.

Under a fixed price contract, your builder agrees to complete the project for a set amount regardless of material cost increases or delays, excluding variations you request. The lender structures the loan around this fixed amount and releases funds according to the progress payment schedule in your contract. Most lenders prefer this structure because the risk of cost blowouts sits with the builder, not you or the bank.

A cost plus contract means you pay the builder's actual costs plus a margin, usually around 10% to 20%. This structure gives you more control over material choices and sub-contractors, but lenders view it as higher risk. You'll need a larger contingency buffer built into your loan amount, and some lenders won't offer construction loans for paramedics under cost plus arrangements at all. If you're an owner builder or managing your own project, lenders typically require detailed quotes from registered sub-contractors before approving the loan, and they'll release funds directly to those sub-contractors rather than into your account.

Land and Construction Package vs Separate Contracts

If you're buying land and building in one transaction, lenders can structure this as a single loan with two settlement dates, or as separate loans that convert into one facility once construction starts.

Under a land and construction package, the lender settles the land purchase first, then holds the construction portion in reserve until you're ready to commence building. Most lenders require you to start construction within a set period from the date you settle the land, usually six to twelve months. If your council approval or development application takes longer than expected, you may need to request an extension or pay interest on the land loan without the build starting.

In our experience, St John Ambulance employees who secure suitable land before finalising builder contracts often benefit from separating the transactions. You settle the land with a standard home loan, giving you time to get council plans approved and choose a registered builder without the pressure of a construction start deadline. Once you're ready to build, you refinance into a construction facility that funds the build and pays out the original land loan at practical completion. This approach works well if you're not certain your build will start within the lender's required timeframe.

Interest-Only Repayments During Construction

Most construction loans automatically operate on interest-only repayment options during the build phase, switching to principal and interest once the property is complete and you move into the permanent loan phase.

Your repayments increase each time a drawdown is released because the amount you owe increases. At the start, you might be paying interest on 15% of the loan amount. After four or five drawdowns, you're paying interest on 80% or more. Some St John Ambulance employees choose to continue renting during the build and structure their budget around increasing repayments every few months as each stage completes.

Once the build reaches practical completion and you receive the occupancy certificate, the loan converts to a standard home loan. This is called a construction to permanent loan. You'll switch from interest-only to principal and interest repayments unless you specifically request to remain on interest-only for investment purposes. The construction loan interest rate is usually higher than standard variable rates during the build, sometimes by 0.2% to 0.5%, then it reverts to the lender's standard variable or fixed rate once construction is complete.

Progress Inspection and Release Conditions

Every time your builder requests a drawdown, the lender sends a quantity surveyor or valuer to inspect the site and confirm the stage is complete before releasing funds.

The inspection usually happens within a few business days of the drawdown request, but delays can occur if the inspector's schedule is full or if the lender's processing team is managing high volumes. If your builder needs payment to pay sub-contractors like plumbers or electricians and the drawdown is delayed, it can hold up the next stage of work. We regularly see this during busy construction periods when lenders are processing multiple inspections across new housing developments.

Some lenders allow you to request additional payments outside the standard progress payment schedule if your builder needs to purchase materials upfront or if a stage is only partially complete but requires payment to continue. These are handled as variations and usually incur an extra inspection fee. If your build involves a custom design with non-standard materials or methods, it's worth confirming with the lender upfront how they'll assess completion at each stage so your builder knows what's expected before requesting payment.

Choosing the Right Structure for Your Build

The structure that works depends on whether you're buying a house and land package from a project home builder, managing a custom build with an architect, or handling the project as an owner builder.

If you're buying a house and land package, the builder usually handles the drawdown process and coordinates with the lender. Your involvement is minimal once the loan is approved. For a custom home or renovation project, you'll need to manage the relationship between your builder and the lender, ensuring the progress payment schedule aligns with the drawdown stages the lender will fund.

St John Ambulance income is generally viewed as stable and consistent, which helps when lenders assess your capacity to manage increasing repayments during the build phase. If you're building while still paying rent or managing another mortgage, make sure your income can cover the peak construction repayment, not just the final repayment once the build is complete. Call one of our team or book an appointment at a time that works for you to discuss how your build structure aligns with your ambulance income and what options are available to you.

Frequently Asked Questions