Construction Loans Explained: How a Progressive Draw Loan Works in WA

Building a new home in WA is genuinely exciting — but the finance works differently to a standard home loan, and most buyers don't realise that until they're already in the process. Here's how construction loans actually work, and what you need to plan for.

What Makes a Construction Loan Different

With a standard home loan, the lender hands over the full loan amount at settlement and you start paying interest (and principal) on the whole amount immediately.

A construction loan works differently. The lender releases the funds progressively — in stages — as the build reaches defined milestones. You only pay interest on the funds that have actually been drawn down, not the total loan amount.

This is called a progress draw structure, and it's standard for new builds in WA.

The Five Progress Payment Stages

In Western Australia, the HIA (Housing Industry Association) and MBA (Master Builders Association) building contracts use a standard five-stage progress payment schedule. Your lender releases funds at each stage:

The five stages — what each one means

• Slab / Base (~10%) — Foundations poured and slab laid. First draw typically released on land settlement or on reaching this milestone.

• Frame (~15%) — Timber or steel frame erected and approved by building surveyor.

• Lockup (~35%) — External walls, windows and doors in place. Largest single draw — the home is now weatherproof.

• Fixing (~25%) — Internal fit-out including plasterboard, cabinetry, fixtures, flooring and painting.

• Practical Completion (~15%) — Final inspection passed, keys handed over. Remaining balance released to builder.

  
  

Interest During Construction — What You Actually Pay

This is the part that surprises most people who are also renting or paying a mortgage on an existing property during the build.

During construction, you only pay interest on the amount drawn down — not the full loan. This is called interest-only during construction, and it significantly reduces your repayments while the build is underway.

Here's what that looks like in practice on a $500,000 construction loan at 6.50%:

Stage	Drawn to date	Monthly interest payment
After slab	$50,000	~$271
After frame	$125,000	~$677
After lockup	$300,000	~$1,625
After fixing	$425,000	~$2,302
At completion	$500,000	~$2,708
After handover	Full P&I repayments begin	~$3,160/mo

This is why people building often manage the finance quite well during the build itself — the progressive nature keeps payments lower. The full repayment kicks in once you have the keys.

The Land Component — How It Fits Together

Most people buying a house and land package in WA settle on the land first and then begin construction. This means:

• You settle on the land and start paying the land portion of your loan immediately (interest only or P&I depending on your loan structure)

• The construction component is a separate facility that draws progressively as the build proceeds

• Both components are usually approved together under a single construction loan application

This is why your deposit needs to cover more than just a percentage of the build cost — it needs to cover a proportion of the total (land + build) value.

What Lenders Need Before Approving a Construction Loan

Construction loans require more documentation than standard home loans. Before approving, most lenders will want to see:

• A fixed-price building contract — signed with a registered builder. Most lenders won't finance an owner-builder without specialist insurance.

• Council-approved plans and specifications — or a certified building permit in WA.

• Builder's licence and insurance details — including home indemnity insurance, which is required for contracts over $20,000 in WA.

• Soil test and site report — required by lenders in most cases to assess any site-specific risk.

"Getting finance pre-approved before you sign a building contract is strongly advisable. The contract sets the price — you want to know your finance is in order before you're locked in."

Common Pitfalls With Construction Finance

• Underestimating variations. Builders may quote a base price, but site-specific costs (levelling, soil conditions, service connections) can add significantly. Your finance needs to account for realistic total costs, not just the headline figure.

• Not accounting for dual costs. If you're renting while building, you're paying rent plus construction interest simultaneously. This needs to be factored into your budget from the start.

• Finance approved on an estimate, not a fixed contract. Lenders won't release funds without a fixed-price contract. If your build costs escalate, you may need to find additional funds.

• Builder delays and finance expiry. Most construction loan approvals are valid for 12–24 months. If your build is delayed significantly, you may need to reapply — potentially at different rates.

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Construction Loans and the New Negative Gearing Rules

One thing worth noting for investors: under the 2026 Federal Budget changes, negative gearing is being preserved for new builds from 1 July 2027. Investors who build (rather than buy established) will retain full access to negative gearing deductions. This has made construction loans increasingly relevant for investors who still want the tax efficiency of a negatively geared property.

General information only. Construction loan requirements, draw schedules and interest structures vary by lender. WA-specific building contract terms and legal requirements apply. Always obtain independent legal and financial advice before signing building contracts. Credit Representative Number 439731.

Planning a new build in WA?

Construction finance has more moving parts than a standard loan. I can help you structure it properly from the start — before you sign with a builder.