What Actually Happens at Construction Loan Settlement
Settlement on a construction loan doesn't work the same way as buying an established property. The loan settles when the land title transfers to your name, not when the house is finished. From that point, you own the land and the lender releases funds progressively as your builder completes each stage. You'll start making interest payments immediately, but only on the amount drawn down so far, not the full loan amount.
In Alkimos, where most buyers are purchasing house and land packages or building on vacant blocks near the Mitchell Freeway extension, this means you're managing two timelines at once: land settlement and construction progress. The land might settle months before your builder breaks ground, depending on how quickly council approval and building permits come through.
How the Progressive Drawdown Works in Practice
Your lender will release funds according to a progress payment schedule that matches the stages your builder invoices. Typically, this includes a deposit or base stage payment at slab down, followed by payments at frame stage, lock-up, fixing stage, and practical completion. Each drawdown requires a progress inspection by the lender's valuer or quantity surveyor to confirm the work has been completed to the value claimed.
Consider a buyer building a four-bedroom home in Alkimos. The land settles first, and the lender releases the first drawdown for the slab. The buyer pays interest only on that amount until the frame stage is complete and the next drawdown is released. By lock-up, around 70% of the build is typically complete, so the buyer is now paying interest on roughly 70% of the total loan amount. This continues until practical completion, when the final drawdown is released and the loan converts to principal and interest repayments.
The timing between each stage can stretch. Builders generally allow 12 to 18 months for completion in new estates like Alkimos, but supply delays, weather, and labour availability all affect the schedule. If your builder invoices for a stage but the inspection doesn't occur for two weeks, that's two weeks you're not yet paying interest on that portion, but it also means two weeks your builder is waiting for payment.
What You're Paying Between Land Settlement and Completion
From the day your land settles, you're paying interest on whatever portion of the loan has been drawn down. Most lenders structure construction loans as interest-only during the build, meaning you're not reducing the principal yet. You're also likely still paying rent or a mortgage on your current property unless you've timed the sale to coincide with moving into the new build.
Lenders also charge a progressive drawdown fee each time they release funds. This usually sits between $150 and $400 per drawdown, depending on the lender. Over five or six drawdowns, that adds up. Some lenders bundle this into a single upfront fee, others charge per inspection. It's worth asking which structure applies before you lodge your construction loan application.
If you're building in Alkimos and you've sold your current home before the new build is ready, you may need to factor in temporary accommodation costs as well. Timing the sale to settle close to practical completion reduces that overlap, but it requires your builder to stick to schedule, which isn't always within your control.
The Role of the Fixed Price Building Contract
Your lender will only approve a construction loan if you're working with a registered builder under a fixed price building contract. This protects both you and the lender by locking in the total build cost and ensuring the builder is licensed and insured. Variations and upgrades can still be added, but the base contract price doesn't shift unless you agree in writing.
In our experience, buyers who try to finalise selections or add upgrades after the loan is approved often find the additional cost pushes them over their approved loan amount. If that happens, you'll either need to cover the difference in cash or reapply for a higher loan amount, which can delay your build start date.
The contract also sets out the progress payment schedule, which the lender uses to structure the drawdown plan. If your builder's payment schedule doesn't align with what the lender considers standard, there can be friction at drawdown time. Most builders in the Alkimos area work with the major lenders regularly, so their contracts tend to align, but it's worth confirming early.
When Council Approval Delays Push Back Your Build Start
Lenders typically require you to commence building within a set period from the disclosure date, often six to 12 months. If council approval or your development application takes longer than expected, you may need to apply for an extension on your loan approval. Some lenders grant this automatically, others reassess your financial position and may adjust your borrowing capacity if your circumstances have changed.
Alkimos sits within the City of Wanneroo, where development application timeframes vary depending on the complexity of the build and whether your block sits within a standard estate or requires additional environmental or design review. Most project home builds on titled land in established estates move through council relatively quickly, but if you're building a custom design or on a battleaxe block, allow extra time.
If your loan approval expires and you need to reapply, interest rates may have shifted, which could affect how much you can borrow or what your repayments will be once the loan converts to principal and interest. Keeping your builder and broker informed of any delays helps avoid surprises.
What Happens if the Build Costs More Than the Loan Amount
If your builder invoices for an amount that exceeds the approved loan, the lender will only release funds up to the approved limit. You'll need to cover the shortfall before the builder continues. This can happen when buyers add upgrades or variations mid-build without confirming they have the cash or additional borrowing capacity to cover them.
In a scenario like this, a buyer building in Alkimos added a porch and upgraded flooring after the frame stage, pushing the total cost up by around $18,000. The lender had already approved the original contract price, so the buyer either needed to find the cash or apply for a top-up. The top-up required a fresh valuation and credit assessment, which delayed the next drawdown by three weeks. The builder continued working, but invoiced for the next stage before the funds were available, which created tension.
To avoid this, finalise all selections and upgrades before signing the building contract and submitting the loan application. If you decide to add something mid-build, confirm with your broker that the additional cost won't push you over your approved limit.
Converting from Construction to Permanent Loan
Once your builder issues a certificate of practical completion and you've completed a final inspection, the loan converts from construction to a standard principal and interest home loan. The interest rate may change at this point, particularly if you were on a different rate during construction or if you're moving from interest-only to principal and interest repayments.
Some lenders offer a construction to permanent loan structure where the same loan continues through both phases, just with a repayment adjustment at completion. Others require a formal variation or internal refinance. The distinction matters if you're planning to lock in a fixed rate once the build is done, as timing the conversion can determine what rate you secure.
Most buyers in Alkimos choose to convert to principal and interest repayments once the build is complete, particularly if they've sold their previous property and no longer have double housing costs. The shift from paying interest only on a partial drawdown to paying principal and interest on the full loan amount can be significant, so it's worth running the numbers with your broker before you reach practical completion.
Why Your Broker Should Review the Contract Before You Sign
Your builder will present a contract, and most buyers assume it's ready to go. However, not all building contracts are structured the same way, and small differences in the progress payment schedule or start date clauses can affect your loan approval or how smoothly the drawdowns progress.
We regularly see this with owner builder finance applications or cost plus contracts, where the payment schedule doesn't follow the standard five or six stage model most lenders expect. If your contract includes milestone payments that don't align with the lender's drawdown structure, you'll either need to renegotiate with the builder or find a lender who can accommodate the variation. Sorting this out before contracts are exchanged avoids delays later.
Call one of our team or book an appointment at a time that works for you. We'll review your building contract, confirm the drawdown schedule aligns with your lender's requirements, and make sure your loan structure supports the build timeline you're working to.
Frequently Asked Questions
When does a construction loan settle?
The loan settles when the land title transfers to your name, not when the house is finished. From that point, the lender releases funds progressively as your builder completes each stage of the build.
What do I pay between land settlement and completion?
You pay interest only on the amount drawn down so far, not the full loan amount. You'll also pay a progressive drawdown fee each time the lender releases funds, typically between $150 and $400 per drawdown.
What happens if the build costs more than the approved loan?
The lender will only release funds up to the approved limit. You'll need to cover the shortfall in cash or apply for a top-up, which requires a fresh valuation and credit assessment.
Can I start building if council approval is delayed?
Most lenders require you to start building within six to 12 months of loan approval. If council approval takes longer, you may need to apply for an extension or risk your loan approval expiring.
When does the loan convert to principal and interest?
The loan converts once your builder issues a certificate of practical completion and you've completed a final inspection. At that point, repayments shift from interest-only to principal and interest on the full loan amount.
