How do construction loan progress payments work?

A progress payment releases part of your construction loan to pay for an agreed stage of building work. You may also hear it called a draw. The money is released in stages as the build progresses, subject to the lender's checks.

If an invoice is already due or the amount looks wrong, go straight to what to do about an invoice problem. Otherwise, start with the stages and what needs to be ready for the first payment.

You will commonly see these names in a building schedule. The work included in each stage, the number of payments and the amounts depend on your signed contract and the schedule your lender approves.

• Base: preparation of the site and the slab or foundations.
• Frame: the structural frame of the home.
• Lock-up or enclosed: the roof, external walls, windows and doors bring the home to an enclosed stage.
• Fixing: internal work such as wall linings, doors, cabinets and fittings.
• Completion: the agreed building work reaches the final stage, with final checks and documents still needed before the lender pays.

There is no percentage schedule that applies to every build. Use your contract and the lender's approved schedule, and check exactly what work the builder must complete before claiming each amount. The construction finance guide has a worked example.

Confirm when your own contribution must be paid and how the builder's deposit will be covered. A deposit due under the building contract and the cash the lender requires you to contribute are separate checks. Do not assume the first loan payment will reimburse a deposit you have already paid.

CommBank, for example, requires your contribution before its progress payments begin. Ask the broker or lender managing your loan what must happen before it is ready to release money, which documents are still missing and how to show that your contribution has been used.

• Confirm the builder and lender are working from the same contract, plans and payment schedule.
• Ask which approvals, insurance documents and other conditions must be satisfied before money can be released.
• Confirm the lender's submission channel, who gives payment authority and whether the first stage needs an inspection.

For the earlier steps, including land settlement, see how construction finance works.

1. Builder issues the claim
2. You check the stage and amount
3. The claim and authority go to the lender
4. Evidence or an inspection is completed
5. The lender releases the approved payment

Before sending a request, I check four things: the amount claimed, the amount approved for that stage, any lender-approved changes and whether the documents or inspection are ready.

In Queensland, QBCC says payments should follow the contract and work completed. Paying early or above the required amount can reduce home warranty protection. Get advice if the stage is disputed.

Send the invoice and your payment authority through the channel your lender specifies. Bankwest's payment instructions are one example: customers must authorise each payment, and the bank may arrange an inspection.

ANZ asks for its signed payment instruction with the builder's invoice. If you paid the builder yourself and want that amount back from the loan, ANZ has a separate process that needs your receipt. Confirm the arrangement before spending your savings.

Ask the managing lender when it expects to release the payment and whether that timeframe begins only after it has a complete request. Send the documents promptly and check whether an inspection needs to be booked. There is no reliable timeframe that applies to every lender and every claim.

Tell your broker or lender the invoice due date when you send it. If the expected release is later, contact them and the builder early to establish what needs to happen. The contract due date does not remove the lender's payment conditions.

Most construction loans follow the same broad sequence, but the detail is not identical. Some lenders publish set stage limits. Others work from the payment schedule in the accepted building contract. Inspections can happen at selected stages, every stage or only when something needs checking.

Variations are covered in more detail in what a fixed-price contract leaves out.

For example, NAB's guide identifies inspections before construction and at the first and final claims for registered-builder projects. Use your own lender’s issued schedule.

Until the lender confirms the draw, don't treat the undrawn part of the loan as money you can spend. And a change the builder has agreed to doesn't increase your loan unless the lender accepts it too.

Here's an example. The builder claims $101,500. The lender approved $92,000 for this stage and has separately accepted a $6,000 variation. That's $98,000, so $3,500 of the claim needs explaining before it's paid. (This assumes the variation isn't already inside the $92,000.) If the payment is due in 6 days, sort out the difference now and check whether the lender needs an inspection first.

Ask the lender exactly what is missing or does not match. Start with the invoice, approved payment schedule and your payment authority. Then provide the inspection result, lender-approved variation or proof of your contribution that it needs. You do not need to resend every document if one item is holding things up.

If the difference affects the money left for later stages, work out the full cost to finish with the broker or lender managing the loan before agreeing to another payment plan.

Construction interest is generally calculated on the amount already drawn, subject to the loan terms. That is why the payment often starts lower and rises as the house takes shape.

These figures are examples of the total loan balance already drawn at different points in the build. They are not individual builder invoices or monthly repayments. The amount of interest depends on the balance, rate and time outstanding.

Simple example only. Your rate, draw amounts and repayment method come from your loan documents.

The lender may still assess whether you can afford the full finished loan, even while interest is being charged on a smaller drawn balance during the build.

Ask whether your loan has progress-payment or inspection fees and when they are charged. Include the repayments, fees and any rent or existing mortgage in your budget while construction is underway.

The last claim usually needs more than the final invoice. Depending on the lender and project, there may be a final inspection, occupancy or completion documents, insurance evidence and confirmation that your contribution has been used.

For example, Westpac requires a satisfactory final inspection and building insurance cover note before its final payment. Ask for your lender’s completion checklist early.

Check the home carefully before authorising payment. The lender's inspection is for its lending decision. It is not a substitute for your own building inspection or legal advice, and it does not settle a dispute about defective or incomplete work.