How Construction Loans Work in Victoria: Progress Payments Explained

If you're building a new home in Victoria, your loan won't work the way a standard home loan does. Instead of the lender paying the whole amount on settlement day, a construction loan is released in stages as the build progresses. These stages are called progress payments, or "drawdowns".

Understanding how progress payments work makes a big difference to how smoothly your build goes. It affects your repayments, your cash flow, and how quickly your builder gets paid. This guide walks through the process step by step.

When you buy an existing home, the lender is lending against something that already exists. With a new build, the house doesn't exist yet. The lender's security grows as the build goes up.

To manage that risk, lenders release money in line with the work completed. Each time your builder finishes a stage, they send an invoice. The lender checks the work, usually with a valuer's inspection, then pays the builder directly.

This protects you too. You're only paying for work that has actually been done, and an independent party is checking progress along the way.

Most Victorian residential building contracts follow a similar structure. The exact percentages are set out in your building contract, but a common pattern looks like this:

Under Victoria's Domestic Building Contracts Act, there are limits on how much a builder can ask for at each stage of a standard contract, and on the size of the deposit. This is one reason it pays to have your contract reviewed before you sign.

The deposit

The deposit is usually paid from your own savings, not from the loan. Most lenders want to see that you've contributed your share before they start releasing funds. If you need the loan to cover the deposit, talk to your broker early, because not every lender will do it.

Your contribution goes in first

This is the part that catches many people out. Lenders generally expect your own money, such as savings or equity, to be used before their money is drawn. If your contribution is $80,000, the first $80,000 of invoices are typically paid from your funds. After that, the lender starts paying progress payments.

One of the biggest advantages of a construction loan is that you only pay interest on the amount that has been drawn, not the full loan amount.

Early in the build, when only the land and the base stage have been paid, your repayments will be relatively low. As more of the loan is drawn, your repayments increase.

Many lenders offer interest-only repayments during construction, usually for a set period such as 12 to 24 months. Once the build is complete, the loan normally switches to principal and interest repayments.

This matters for your budget. If you're paying rent while you build, interest-only repayments on a partly drawn loan can make the costs much more manageable. Ask your broker to map out the expected repayment at each stage so there are no surprises.

Here's what a typical drawdown looks like in practice:

1. The builder completes a stage and issues a progress invoice.
2. You review the invoice and check the work matches what the contract describes.
3. You sign an authority to pay and send it, with the invoice, to the lender or your broker.
4. The lender orders a progress inspection from a valuer, who confirms the work is done.
5. The lender pays the builder directly, usually within a few business days of the inspection.

A good broker will help coordinate this, especially the first one or two drawdowns, so you get used to the process. Delays usually happen when paperwork is missing, so keeping invoices and authorities organised helps everything move faster.

Most lenders want a fixed price building contract with a registered builder. That gives them certainty about what the finished home will cost.

Cost-plus contracts, where the final price depends on the actual cost of materials and labour, are harder to finance. Some lenders won't accept them at all. If you're considering one, speak with a broker before you sign anything.

You'll also usually need to provide:

• The signed building contract
• Council-approved plans and specifications
• A building permit
• Domestic building insurance from the builder (required in Victoria for most work over a certain value)
• A list of any items you're supplying yourself, such as appliances or landscaping

Variations are changes to the contract after it's signed, such as upgrading the kitchen or moving a wall. They are very common, but they need to be managed carefully.

If a variation increases the contract price, the lender needs to know. They may need to reassess the loan, and in many cases you'll need to pay for the variation yourself, upfront, before the lender will continue releasing funds.

The best approach is to finalise as many choices as possible before signing the contract, and keep a buffer in your budget. A buffer of 5 to 10 percent of the build cost is a sensible starting point.

The final progress payment is made at practical completion, when the home is finished and ready to live in. Before you authorise this payment, do a careful final inspection, ideally with an independent building inspector.

Once you release the final payment, your leverage with the builder is reduced, so make sure any defects are noted in writing. After handover, your loan usually switches from construction mode to a standard home loan.

If you're buying land and then building, you may have two stages of finance. First, the land purchase settles. Then the construction loan kicks in once you've signed a building contract.

Some lenders can approve both at the same time, which gives you more certainty. Others assess the land first and the build later. If your land is in a new estate that hasn't titled yet, timing becomes even more important, because your approval may need to stay valid until the land settles.

If you already own the home and plan to demolish and rebuild, the process is similar, but with a few extra steps such as demolition permits and arranging somewhere to live during the build. We've covered this in detail in our guide to knock-down rebuild finance.

Construction lending policies vary a lot between lenders. Some are more flexible about owner-builder work, some handle cost-plus contracts, and some have faster turnaround on progress inspections. Choosing the right lender for your build can save time and stress.

At Ridge Finance, our team works with construction loans every week. We help you:

• Work out how much you can borrow for land and build
• Choose a lender whose policy fits your contract and builder
• Plan your cash flow and repayments across each stage
• Coordinate drawdowns so your builder is paid on time

We're based in Oakleigh and help clients building across Melbourne's south-east, from Oakleigh to Glen Waverley, as well as construction clients across Australia.

If you're planning a build, read more about our construction loans, or book a free chat and we'll walk you through how it would work for your project.