Building a custom home gives you control over design and layout, but construction finance works differently to a standard mortgage.
The loan advances in stages as your build progresses, and each stage creates a potential point of failure. Budget blowouts, builder delays, and council approval variations can all affect your loan structure, your serviceability, and your ability to settle. Most lenders require you to commence building within a set period from the Disclosure Date, and missing that window can void your approval. If you're working rotating shifts or planning a build around NDIS housing needs, these timelines matter.
Builder Insolvency and Incomplete Builds
If your registered builder becomes insolvent mid-project, your lender stops releasing funds and you're left with a partially completed home and a loan already drawn to the tune of $150,000 or more. Consider a scenario where a nurse in regional Queensland had engaged a builder under a fixed price building contract for a four-bedroom home. Three drawdowns had occurred, totalling $180,000, when the builder entered administration. The lender froze further progress payments, and the borrower faced the cost of engaging a new builder to complete the remaining work, which exceeded the original contract price by $40,000. The lender reassessed the construction loan application based on the revised budget, and serviceability became an issue because the additional $40,000 pushed the total loan amount beyond what the borrower could comfortably service on a single income. The build sat incomplete for four months while the borrower secured a guarantor to support the additional borrowing. Home warranty insurance covered some of the loss, but not the gap between the original fixed price and the cost of completion.
Lenders require you to use a licensed and insured builder for this reason, but insurance doesn't eliminate the cash flow gap or the delays. You're still making repayments on the land and drawn portion of the loan while the project stalls.
Cost Overruns and Variation Approvals
Construction projects frequently exceed the original contract price due to site conditions, design changes, or material cost increases. Your lender approves a loan amount based on the fixed price building contract you submit at application. If the project cost increases, you either cover the gap from savings or apply for a loan variation. A loan variation requires a fresh assessment of your serviceability and may trigger a new valuation. If your lender declines the variation, you're left to fund the shortfall out of pocket or negotiate a reduced scope with your builder.
In our experience, the most common cause of cost overruns is underestimating site preparation. Sloping blocks, poor soil conditions, and the need for retaining walls can add $20,000 to $50,000 to the build cost before the slab goes down. If your development application required specific earthworks or drainage solutions, those costs should be itemised in your initial contract. If they're not, the builder will issue variations once excavation begins, and you'll need to fund them before the next progress payment is released.
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Progress Payment Delays and Interest Costs
Construction loans only charge interest on the amount drawn down, but the drawn balance increases with each progress payment. Your lender releases funds based on a progress payment schedule tied to specific build stages: slab down, frame up, lockup, fixing, and practical completion. Each release requires a progress inspection by the lender's valuer, and inspections take time. If the valuer identifies incomplete work or variations that don't match the approved plans, the drawdown is delayed. You're still liable for the builder's invoice, and most fixed price contracts include penalty clauses for late payment.
Progress inspections also rely on council plans matching the work on site. If your builder has deviated from the approved design without lodging a variation with council, the lender may refuse to release funds until council approval is updated. This can add weeks to your build timeline and trigger disputes over who pays the holding costs.
Lenders charge a Progressive Drawing Fee for each inspection and drawdown, typically between $300 and $500 per stage. Over five or six drawdowns, that's $2,000 to $3,000 in fees on top of your loan amount. Some lenders cap these fees or bundle them into the loan, but you need to confirm the structure before you commit.
Serviceability Reassessment During Construction
Your construction loan approval is conditional on your financial position remaining stable throughout the build. If you reduce your hours, take unpaid leave, or change employers during construction, your lender may reassess your serviceability before releasing the next drawdown. This is a particular concern for nurses planning parental leave or transitioning from permanent to agency work. A change in employment status mid-build can trigger a request for updated payslips, tax returns, and a fresh credit check. If your income has dropped or your debts have increased, the lender may freeze further progress payments until you can demonstrate capacity to service the full loan amount.
Some lenders offer interest-only repayment options during the construction phase, which reduces your monthly commitment while the build is underway. Once construction is complete, the loan converts to principal and interest repayments based on the final drawn balance. If you've planned your budget around interest-only repayments and the lender requires principal and interest from the start, your serviceability calculation changes and you may need to adjust your build scope or delay the project.
Council Approval Delays and Contract Expiry
Your construction loan approval includes a condition that you commence building within a set period from the Disclosure Date, usually six to twelve months. If your development application is delayed by council or you need to lodge variations for design changes, you risk the loan approval expiring before construction begins. Extending an expired approval isn't automatic. The lender will reassess your application using current interest rates and updated serviceability rules, and if rates have increased or lending criteria have tightened, you may no longer qualify for the original loan amount.
Council delays are common when building in growth corridors or areas with specific planning overlays. If your block requires additional reports for bushfire, flood, or environmental impact, expect the development application process to take three to six months. Factor this into your timeline when applying for construction finance, and don't lock in a builder's start date until council approval is confirmed.
Land Holding Costs During Construction
If you've purchased land separately and plan to build later, you're carrying holding costs until the home is complete. Land loans require principal and interest repayments from settlement, and if you're also paying rent while the build progresses, the dual commitment reduces your serviceability for the construction loan. Some lenders offer a land and construction package that defers full repayments until practical completion, but you're still paying interest on the land portion from day one.
Holding costs also include council rates, land tax (if applicable), and insurance. These costs compound over a twelve-month build and need to be factored into your pre-approval assessment. If your lender hasn't accounted for land holding costs in your serviceability calculation, you may find yourself stretched once construction begins and the drawn balance starts increasing.
Splitting Risk Across Fixed and Variable Rates
Construction loans can be structured with a mix of fixed and variable portions, but fixing during construction has limitations. Most lenders won't allow you to fix a construction loan until the build is complete and the loan converts to a standard mortgage. If you're building in a rising rate environment, your interest rate during construction will track variable movements, and your monthly repayments can increase before you've even moved in. Once the build is finished, you can split the loan or fix a portion, but the construction phase itself is typically variable-only.
Some lenders allow you to lock in a fixed rate at application and apply it once the loan converts, but this isn't universal. If rate certainty is important to you, confirm the lender's policy before signing the construction loan contract. If you're comparing lenders, ask whether they offer rate lock options during construction or whether the conversion to fixed happens only at practical completion.
Call one of our team or book an appointment at a time that works for you. We'll run through your build timeline, your contract structure, and the specific conditions your lender will apply to progress payments and serviceability reviews.
Frequently Asked Questions
What happens if my builder becomes insolvent during construction?
Your lender will freeze further progress payments, leaving you with a partially completed build and a loan already drawn. You'll need to engage a new builder to complete the work, which often costs more than the original contract. Home warranty insurance may cover some losses, but not the cash flow gap or delays.
Can my construction loan be reassessed during the build?
Yes. If your income, employment status, or debts change during construction, your lender may reassess your serviceability before releasing the next drawdown. A reduction in hours or change from permanent to agency work can trigger this review.
What are progress payment delays and how do they affect me?
Progress payments are released after a lender's valuer inspects the build at each stage. If the valuer identifies incomplete work or unapproved variations, the drawdown is delayed. You're still liable for the builder's invoice, and late payment may trigger penalty clauses in your contract.
Do I pay interest during construction?
Yes, but only on the amount drawn down so far. As each progress payment is released, your loan balance increases and so does the interest charged. Most construction loans require interest-only repayments during the build, converting to principal and interest once complete.
Can I fix my interest rate during construction?
Most lenders don't allow you to fix a construction loan until the build is complete and the loan converts to a standard mortgage. During construction, your rate is typically variable, which means your repayments can increase if rates rise before you move in.
