What Are the Key Steps in a Construction Loan Process?
Construction loans follow a structured process with funds released in stages rather than as a lump sum. According to the lending specialists at FS Loan, understanding each step can help you manage cash flow and avoid delays during construction.
Step 1: What Is a Construction Loan and How Does It Work?
A construction loan is designed specifically for building a property. Instead of receiving the full loan amount upfront, the lender releases funds in progress payments based on construction milestones.
Step 2: How Do Progress Payments Work?
Funds are released in stages, such as slab, frame, lock-up, and completion. You only pay interest on the amount drawn at each stage, which helps manage costs during the build.
Typical progress payment split:
| Stage | Percentage |
|---|
| Slab / base | 10% to 15% of the total loan |
| Frame | 15% to 20% |
| Lock-up (roof, external walls, windows) | 20% to 25% |
| Fit-out (internal fixtures and fittings) | 20% to 25% |
| Completion / handover | 15% to 25% |
Example: On a $500,000 construction loan, the first drawdown at the slab stage is approximately $60,000 to $75,000.
Your lender will inspect before releasing each payment to confirm the work meets the agreed standard.
Step 3: What Deposit Do I Need for a Construction Loan?
Most lenders require a deposit similar to standard home loans, often around 5% to 20%, depending on your financial situation and eligibility.
