A construction loan progress payment is a staged release of loan funds to pay a builder as each part of the build is completed, usually after the builder issues a claim and the lender confirms the work. Unlike a standard purchase, where the full loan settles on one day, a construction loan is drawn down over months as the property takes shape.
On episode 111 of the podcast, Dion and Joel and Bianca from ECHO Property talk through funding the build and why the structure has to be right before the site is purchased. This article goes one level deeper: how the money actually moves once construction starts.
How is a construction loan different from a purchase loan?
| Purchase loan | Construction loan | |
|---|---|---|
| When funds are released | In full at settlement | In stages as the build progresses |
| Who is paid | The vendor | The builder, claim by claim |
| Interest charged on | The full balance from day one | Usually only the amount drawn so far |
| Valuation | Of the property as it stands | Often on an as-if-complete basis, plus checks along the way |
| Paperwork the lender needs | Contract of sale | Building contract, plans, specifications and approvals |
| Main risk | Price and timing at purchase | Delays, variations and costs above the contract price |
The difference that catches people is timing. A purchase loan is one event. A construction loan is a series of them, and each one depends on the last.
What do Queensland's rules say about deposits and progress claims?
In Queensland, the Queensland Building and Construction Commission sets limits on what a builder can ask for. According to the QBCC, for works valued at more than $20,000 the maximum deposit is 5% of the contract price, and progress claims must match the work done: the contractor “can't claim more than 50% of the contract price, including the deposit, until at least 50% of the work onsite has been completed” (QBCC, Deposits and progress payments).
The QBCC no longer prescribes fixed stages, so the number and timing of payments is negotiated in the contract. It recommends linking payments to clearly defined construction stages, so the owner can inspect the work before paying.
What are the usual stages of a build?
Contracts differ, but many residential builds are claimed in a familiar order:
- Deposit. Paid when the contract is signed, within the legal cap.
- Base. The slab or footings are complete.
- Frame. The structural frame is up.
- Enclosed. Roof, external walls and windows are on.
- Fixing. Internal linings, doors and fixtures are installed.
- Practical completion. The build is finished and ready for handover.
At each stage the builder issues a claim. The lender will usually want the claim, and often an inspection or progress valuation, before it releases funds for that stage.
Whose money is spent first?
Usually yours. Where the borrower is contributing cash or equity to the build, lenders commonly require that contribution to be spent before their own funds are released. In practice, the first claims may be paid from your money and the later claims from the loan.
This matters for planning. If your contribution is sitting in the wrong account, or tied up in an asset that has not been released, the first claim can arrive before the money is ready.
Prefer to start with the framework? Download the free Portfolio Blueprint →
What happens to interest during construction?
On most construction loans, interest is charged only on the amount drawn so far, so the cost grows as the build progresses. Many are interest-only during construction, which keeps repayments lower while the property earns no rent.
That still has to be paid from somewhere. A build that runs months over schedule means months more interest with no income against it, which is why the holding cost belongs in the plan from the start.
What if the build costs more than the contract?
The lender funds against the contract price it assessed. Variations, upgrades and costs above that price may need to be paid from your own funds or approved separately by the lender. If they are not planned for, a project can stall with the frame up and the money gone.
This is where contingency earns its place. The episode makes the point that council approvals, development requirements and unexpected costs rarely go exactly to plan. A contingency set aside before construction starts is far easier to arrange than finance sought in the middle of a build.
What should be settled before the building contract is signed?
- The full funding stack. Your contribution, the loan amount and the contingency, with each one confirmed.
- The order money moves. Which claims your funds cover and when the loan takes over.
- The holding cost. Interest during construction for a realistic timeframe, not the best case.
- The exit. What the loan becomes at completion: held and rented, refinanced or sold.
- The structure. Which entity owns the property and how the loans are split, settled before the first claim.
Common questions
How do construction loan progress payments work?
A construction loan releases funds in stages rather than all at once. The builder issues a claim at each stage of the build. The lender usually checks the work (sometimes with an inspection or progress valuation) and then pays that stage. Interest is generally charged only on the amount drawn so far.
What is the maximum building deposit in Queensland?
According to the QBCC, for works valued at more than $20,000 the maximum deposit a contractor can request is 5% of the contract price. Lower-value works have higher caps, and a deposit of up to 20% is allowed in limited circumstances involving substantial off-site prefabrication.
Does the lender pay the builder before my own money is used?
Usually not. Where a borrower is contributing cash or equity to a build, lenders commonly require that contribution to be spent first, so the early progress claims may be paid from your own funds before the loan is drawn. Each lender’s requirements differ.
What happens if my build goes over budget?
The lender funds against the contract price it assessed. Variations and costs above that price may need to be paid from your own funds or approved separately by the lender, which is why a contingency should be set aside before construction starts. Any additional lending is subject to assessment and lender criteria.
The takeaway
A construction loan is not one decision. It is a sequence of payments that has to stay funded from the first claim to practical completion.
Know whose money moves first. Plan the interest for a realistic timeframe. Hold a contingency. Settle the structure and the exit before the contract is signed. If you want that mapped for your build, Book a Call.
This article is general information only. It does not take your individual circumstances into account and is not credit, tax, legal or financial product advice. All lending is subject to individual assessment and lender criteria. Speak with your own advisers before acting. Building contracts, deposits and progress claims are governed by Queensland law and your contract; speak with a solicitor about your building contract.