Why Construction Loan Fees Matter When Building

Construction finance operates differently from a standard home loan, and the fee structure reflects that complexity.

You pay for the lender's involvement across multiple stages, from initial application through to each progressive drawdown as your build advances. In Canterbury, where knock-down rebuilds and custom homes on established blocks are common, understanding these fees upfront allows you to budget accurately and avoid surprises when progress payments are due.

What You Actually Pay When Applying for Construction Finance

Most lenders charge an application fee that covers their assessment of both your borrowing position and the viability of your build. This fee typically ranges from $600 to $1,200, depending on the lender and the complexity of your construction loan application. Some lenders waive this fee during promotional periods, but it remains standard practice across most construction funding products.

The application fee is separate from valuation costs. Because construction finance requires two valuations - one for the land and one for the completed property based on council plans - you should expect to pay between $300 and $600 for each. These are usually charged directly by the valuer and are non-refundable, even if your application does not proceed.

If you engage a registered builder under a fixed price building contract, lenders generally view the application as lower risk. Owner builder finance attracts higher scrutiny and often higher fees, as lenders require additional documentation to confirm your capacity to manage sub-contractors and deliver the project on time.

The Progressive Drawing Fee and How It Applies

A Progressive Drawing Fee is charged each time the lender releases funds to your builder during the construction phase. This fee covers the cost of the lender arranging a progress inspection to verify that the stage of work has been completed to the required standard before releasing payment.

The fee typically ranges from $200 to $400 per drawdown, and most builds involve five to six progress payments. That means you could pay between $1,000 and $2,400 in drawing fees across the life of the build, depending on your lender and the number of instalments in your progress payment schedule.

Some lenders cap the total drawing fees or bundle them into a single upfront charge. Others apply the fee per inspection. When comparing lenders, ask whether the Progressive Drawing Fee is fixed or variable, and whether it includes the cost of the progress inspection or if that is charged separately.

How Interest Accrues During the Build

Lenders only charge interest on the amount drawn down at each stage, not the full loan amount. During construction, most lenders require interest-only repayment options, meaning you pay only the interest that accrues on the funds released to date.

Consider a scenario where a buyer in Canterbury is building a custom home on a subdivided block near Maling Road. The land and construction package totals $1.2 million, with the land valued at $700,000 and the build cost fixed at $500,000. After the first progress payment of $100,000, the borrower pays interest only on $800,000 (the land plus the first drawdown), not the full $1.2 million. As each subsequent payment is released, the interest calculation adjusts.

This structure reduces repayments during the build, but it also means your interest cost increases progressively. The interest rate applied to construction funding is typically higher than a standard variable rate, and it can be either fixed or variable depending on the product. Once the build is complete and the construction to permanent loan converts, the interest rate usually reverts to the lender's standard home loan rate.

Fees You May Not Expect Until Settlement

Settlement fees apply twice in most construction loan structures: once when you purchase the land, and again when the build is complete and the loan converts to a standard mortgage. Each settlement can attract legal fees, bank fees, and disbursements that add between $800 and $1,500 per transaction.

If your lender requires mortgage insurance because your deposit is below 20%, that premium is calculated on the total loan amount and added to your balance at the first settlement. For a $1.2 million loan with a 10% deposit, mortgage insurance could exceed $30,000, and it is capitalised into the loan rather than paid upfront in most cases.

Title registration fees and transfer duty apply to the land purchase, and these are state-based charges unrelated to your lender. In Victoria, transfer duty on a $700,000 land purchase would be approximately $37,000, due at settlement. Your solicitor will provide a detailed breakdown, but these are not construction loan fees in the technical sense - they are statutory costs that apply regardless of how you finance the purchase.

The Difference Between Fixed Price Contracts and Cost Plus Structures

Lenders prefer fixed price building contracts because they provide certainty around the final loan amount and reduce the risk of cost overruns. Under a fixed price contract, your builder agrees to complete the project for a set sum, and your progress payment finance is structured around that figure.

A cost plus contract, where you pay the builder's actual costs plus a margin, introduces variability. Lenders may impose higher fees, require a larger contingency buffer, or decline the application altogether if they cannot verify the final build cost upfront. Some lenders will not offer construction funding under a cost plus arrangement unless you are an owner builder with demonstrated experience.

If you are demolishing an existing home and rebuilding on the same site - common in Canterbury, where Edwardian and weatherboard homes on larger blocks are being replaced with contemporary two-storey designs - your lender will require council approval and a development application before releasing any funds. The council plans must align with the builder's contract, and any variations during construction may trigger additional valuation fees or require lender consent before the next drawdown.

Why Timing Affects Your Fee Structure

Most lenders require you to commence building within a set period from the Disclosure Date, typically six months. If construction is delayed beyond that window, the lender may revalue the land, reassess your borrowing position, or apply an extension fee to maintain the approval.

Construction delays can also affect your interest rate. If you lock in a fixed rate during the application phase and the build extends beyond the initial term, the rate may revert to a variable product before completion. Some lenders allow you to extend the fixed term for a fee, but this is not universal.

In our experience, buyers building in established suburbs like Canterbury often underestimate the time required to secure council plans and demolition permits. If your build timeline is uncertain, consider a lender that offers flexibility around construction start dates or does not penalise delays caused by council approvals.

Should You Compare Lenders Based on Fees Alone

Fees are one component of the total cost, but the construction loan interest rate and the structure of the progress payment schedule matter more over the life of the build. A lender with lower drawing fees but a higher interest rate may cost you more overall than a lender with higher upfront fees and a competitive rate.

When evaluating construction loan options from banks and lenders across Australia, compare the total cost across the build period and the first 12 months after completion. Some lenders offer discounted rates for the first year of the construction to permanent loan, while others apply a margin during construction and reduce it once the loan converts.

If you are planning a house renovation loan or a house & land package rather than a full custom build, the fee structure may differ. Renovations often require fewer progress payments, and some lenders treat them as home improvement loans rather than construction funding, which can reduce both fees and complexity.

Call one of our team or book an appointment at a time that works for you. We can outline the fee structure for each lender, model the total cost across your build timeline, and help you identify the product that aligns with your project and budget.

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