Construction Loan Fees and What You Need to Know

Building your dream home is an exciting journey, but understanding the financial aspects of construction loans is crucial to ensuring your project stays on budget. Unlike traditional home loans, new home construction finance comes with unique fees and charges that reflect the progressive nature of building from the ground up.

At Status Home Loans, we help clients in Mandurah and across Australia access construction loan options from banks and lenders throughout the country. Let's explore the various fees you'll encounter when securing construction funding for your project.

Understanding Construction Finance Basics

Construction finance differs from standard home loans because lenders only charge interest on the amount drawn down at each stage of your build. Rather than receiving the full loan amount upfront, funds are released according to a construction draw schedule as your registered builder completes each phase of the project.

This progressive drawdown structure means you'll encounter specific fees that don't apply to traditional mortgage products. Whether you're looking at house & land packages, a land and construction package, or custom home finance, understanding these costs is essential.

Application and Establishment Fees

When you submit your construction loan application, most lenders charge an application fee. This covers the administrative costs of assessing your loan, reviewing council plans, verifying the building contract with your registered builder, and evaluating your borrowing capacity.

Establishment fees are also common with construction funding. These fees cover the lender's costs in setting up your loan facility and can range from several hundred to over a thousand dollars, depending on the lender and loan amount.

Progressive Drawing Fees

One of the most significant fees unique to building loan products is the Progressive Drawing Fee. This charge applies each time the lender releases funds during the construction phase.

Here's how progressive payments typically work:

• The lender arranges a progress inspection at each stage
• An independent assessor verifies the completed work
• Once approved, funds are released to pay sub-contractors
• The Progressive Drawing Fee is charged for this service

Most construction projects involve five to six progress payments, so these fees can add up. The Progressive Payment Schedule is usually outlined in your fixed price building contract and aligns with major milestones such as:

1. Base stage (slab or footings)
2. Frame stage
3. Lock-up stage (roof, windows, doors)
4. Fixing stage (plumbing, electrical)
5. Practical completion

Valuation and Inspection Costs

Lenders require professional valuations at various stages of your build. An initial valuation assesses the suitable land value and the projected value of the completed property. Additional progress inspections throughout construction ensure the work meets quality standards and justifies each drawdown.

These valuation and inspection fees protect both you and the lender by confirming the project is progressing according to the fixed price contract and that funds are being used appropriately. Whether you're working with plumbers, electricians, or other trades, these inspections verify that quality construction standards are being maintained.

Interest Rate Considerations

During the construction phase, most lenders offer interest-only repayment options. You'll pay interest only on the instalments already drawn down, not the full loan amount. This can help manage cash flow during the build period.

The construction loan interest rate may differ from standard home loan rates and can be either fixed or variable. Once construction is complete, many borrowers convert to a construction to permanent loan, transitioning from the building phase to standard principal and interest repayments.

Additional Fees to Consider

Depending on your specific circumstances, you may encounter other charges:

• Development Application Fees: Required if your project needs council approval beyond standard building permits
• Legal Fees: For reviewing your cost plus contract or fixed price contracts
• Delay Fees: If you don't commence building within a set period from the Disclosure Date
• Owner Builder Finance Fees: Additional charges may apply for owner builder finance arrangements
• Off the Plan Finance Fees: Specific costs for purchasing off the plan properties

Some construction finance products also cater to specific needs such as house renovation loan requirements, spec home finance, home improvement loan features, or project home loan structures. Each may have slightly different fee arrangements.

Managing Your Construction Finance Costs

Understanding the complete fee structure helps you budget accurately for your new home. When comparing lenders, look beyond the interest rate and consider:

• Total application and establishment fees
• Progressive Drawing Fee amounts and frequency
• Valuation and inspection costs
• Any ongoing monthly fees
• Penalties for making additional payments or early completion

A renovation Finance & Mortgage Broker can help you access construction loan options that align with your land and build loan needs, whether you're pursuing a custom design, working with house & land packages, or managing progress payment finance for a unique project.

At Status Home Loans, we understand that building your new home represents a significant financial commitment. Our team has extensive experience with construction draw schedules, progress payment schedules, and helping clients understand exactly what they'll pay throughout their building journey.

Whether you're looking to build your dream home in Mandurah or anywhere across Australia, we can help you understand the total cost of your construction funding and find suitable options for your circumstances.

Call one of our team or book an appointment at a time that works for you to discuss your construction finance needs. Our mortgage brokers can explain the fee structures from various lenders and help you make an informed decision about your new home construction finance.