A construction loan is paid out in stages, so how you manage each stage matters as much as the loan itself. For a sole trader, that means planning around uneven business income while the build moves ahead.
Understanding the payment steps early makes it easier to plan. This article walks you through those steps.
How Does a Construction Loan Draw Schedule Work?
A construction draw schedule splits your loan into stages, and the lender releases money to your builder as each stage is finished. Common stages include slab, frame, lock-up, fixing and completion, though the exact stages depend on your contract and lender.
When the builder finishes a stage, they send a progress claim. Many lenders then arrange a progress inspection to confirm the work is done before they release funds. This is why your construction loan is not one lump sum landing in your account. The lender pays the builder in instalments as the house takes shape.
The trade-off is timing. Timing varies by lender, and a builder may expect payment within the terms of your contract. Ask your broker and builder how long your lender usually takes for a draw, so you are not caught short.
Interest on a Construction Loan: What You Pay at Each Stage
During construction, you typically pay interest only on the amount drawn so far, not on the full approved limit. This means repayments start small and grow as more stages are paid out.
Consider a sole trader in Sydney who is approved for a $600,000 construction loan. This is an illustrative example using a rate of 6.75% p.a., not a current offer. After the first stage, $150,000 has been drawn, so monthly interest is about $843.75. Once $450,000 is drawn, interest is about $2,531.25 a month. At the full $600,000, it reaches $3,375 a month.
The outcome: this borrower budgeted for the final figure from day one, rather than the early low figure. They set aside money from each invoice they were paid into a separate account, so the higher repayments in the later stages never forced a scramble. The rate you receive will depend on your lender, deposit and circumstances.
Some lenders may also charge a Progressive Drawing Fee for each payment they release. Ask for the full fee schedule before you choose a lender, as these costs add up over five or six stages.
Managing Cash Flow as a Sole Trader During the Build
The most useful habit for a sole trader is to keep your business cash flow and your building costs in separate accounts. This stops a slow month in your trade from putting pressure on the build, and the other way around.
Your income can rise and fall, so plan for a few months where work is quiet. Holding a buffer is sensible, but it has a cost. Money sitting aside is not working in your business, and borrowing a larger amount to create a buffer means more interest once it is drawn. Weigh that against the risk of running dry mid-build.
It also pays to understand how much a lender may let you borrow before you sign a building contract. Your borrowing capacity is worked out differently for self-employed people, and lenders may ask for documents such as tax returns and financial statements. Checking this early gives you a firm budget for the land, the build and your living costs.
Extras are another cash flow pressure point. Variations, such as upgrading fittings or changing the layout, are usually billed on top of the contract price. Some of these costs may not be covered by the loan, so plan to fund them yourself or ask your broker about options before you agree to the change.
Fixed Price or Cost Plus Contract: Which Carries More Risk?
A cost plus contract carries more risk for you, because the final price can move as the build goes ahead. A fixed price building contract sets the price up front, which gives you a clearer number to borrow against.
With a cost plus contract, you pay for materials, labour and the builder's margin as they occur. If a plumber, an electrician or another sub-contractor costs more than expected, your total rises. That makes it harder for a lender to assess the loan amount, and it may call for a larger buffer.
A fixed price contract is not risk free either. Variations and some allowances can still change the final cost, so read the inclusions and exclusions carefully. Have your builder confirm in writing what is and is not covered, and check on the NSW Fair Trading licence register that your builder holds the correct licence for the work. For residential work over $20,000, also ask for the Home Building Compensation certificate before you sign or pay anything.
Before building starts, you will also need your council approval or other approvals in place, and lenders usually want to see approved plans. Delays here push back your first draw, so your interest and holding costs may start before the build does.
Moving to a Permanent Loan Once the Build Is Complete
When construction finishes, your loan usually moves from interest-only on the drawn amount to full principal and interest repayments. Your repayments will often rise at that point, so it is worth planning for it before handover.
Some lenders offer a construction to permanent loan, which converts automatically. Others may need you to arrange a new loan or review your existing one. If you want to compare what else is available, a loan health check can show whether your loan still suits you once the build is done. If you decide to switch, refinancing is an option, though exit fees and other costs may apply, so check these first.
If you are a sole trader and your business income has changed during the build, tell your broker early. The earlier we know, the more time there is to choose the right structure for your repayments.
A build is a long project, and you should not have to carry it alone. Call one of our team or book an appointment at a time that works for you. We will go through your draw schedule, your cash flow and your contract, and stay beside you from the first draw to the day you receive the keys and beyond.
Frequently Asked Questions
How does a construction loan draw schedule work?
The lender releases your loan to the builder in stages, such as slab, frame, lock-up and completion. Many lenders arrange a progress inspection before each payment is released.
Do I pay interest on the full construction loan amount straight away?
Typically you pay interest only on the amount drawn so far, so repayments grow as more stages are paid. Check your lender's terms, including any fee for each payment.
Is a fixed price or cost plus contract riskier?
A cost plus contract carries more risk because the final price can move during the build. A fixed price contract gives more certainty, but variations can still add to the cost.
What happens when my build is finished?
Your loan usually moves to principal and interest repayments, which are often higher. Some lenders convert automatically, while others may need a new loan arrangement.
