Avoid These Construction Loan Compliance Mistakes

Fixed Price Contracts Are Non-Negotiable for Most Lenders

Most lenders will not approve a construction loan unless you have a fixed price building contract in place. This contract needs to detail the total build cost with no room for variation, and it must be signed by a registered builder before your application progresses. Cost plus contracts, where you pay the builder's costs plus a margin, rarely meet lender compliance requirements because the final loan amount cannot be confirmed upfront.

Consider a detective building a custom home who has found land and engaged a builder on a cost plus arrangement. The builder estimates $450,000 but explains the final cost will depend on material prices and subcontractor availability. The lender declines the construction finance application outright. The same applicant returns with a fixed price building contract for $465,000, and the loan is approved within a week. The contract removes the lender's risk of cost blowouts and satisfies their compliance framework.

Commence Building Within a Set Period From the Disclosure Date

Your construction loan approval will include a condition that you commence building within a set period from the disclosure date, typically six months. If you miss that window, your approval lapses and you will need to reapply. This deadline exists because lenders price construction loans based on current interest rates and property valuations, both of which can shift significantly over time.

In our experience, delays often come from council approval taking longer than expected or the builder being unable to start on the original timeline. If you know your development application is still pending or your builder has flagged a three-month wait, notify your broker before your approval is issued. Some lenders will extend the commencement period if you request it upfront, but almost none will do so after the fact.

Progress Payment Schedules Must Align With the Building Contract

Your lender will release funds according to a progressive payment schedule, not when your builder asks for money. The schedule is usually broken into five or six stages such as base stage, frame stage, lock-up, fixing, and completion. Each stage must match a milestone in your fixed price building contract, and the builder cannot request payment until that stage is verified by a progress inspection.

The inspection is arranged by the lender and carried out by a qualified valuer or quantity surveyor. They confirm the work has been completed to the standard described in the contract and council plans before the lender releases the next drawdown. If the inspection identifies incomplete or substandard work, the payment is withheld until the builder rectifies the issue. This protects you and the lender from paying for work that has not been done.

Registered Builders and Adequate Insurance Are Mandatory

Your builder must hold current registration in the state or territory where the build is taking place, and they must carry adequate home warranty insurance. Lenders will request proof of both before they issue a formal approval. If your builder is not registered or their insurance has lapsed, your application will be declined regardless of how strong your financial position is.

Owner builder finance is available in some cases, but the compliance requirements are significantly higher. You will need to demonstrate trade qualifications or substantial building experience, and you will typically be required to hold a larger deposit. Most lenders will also cap the loan amount at 80% of the land and construction value, compared to 90% or 95% for a registered builder.

Council Approval Must Be Unconditional Before Settlement

You cannot draw down construction funds until you have received unconditional council approval for your development application. If your approval is still subject to conditions such as amended plans or additional engineering reports, the lender will not release any money. This includes the first payment to the builder, which means construction cannot start.

Some applicants assume they can settle on the land and sort out council approval later. That approach fails because lenders treat land and construction as a single package when the loan is structured as a land and construction package or a construction to permanent loan. If the construction cannot proceed, the lender will not fund the land purchase either. The solution is to lodge your development application early and allow at least three months for council to issue an unconditional approval before your intended settlement date.

Progressive Drawing Fees Add Up Across Multiple Drawdowns

Lenders charge a progressive drawing fee each time they release funds during the construction phase. The fee typically ranges from $150 to $400 per drawdown, and with five or six stages in a standard build, you could pay $1,500 to $2,400 in fees before your home is complete. These fees cover the cost of arranging the progress inspection and processing the payment to your builder.

These fees are separate from your loan amount and are usually deducted from each drawdown or charged to a separate account. Factor them into your budget when calculating how much cash you will need during construction. If you are building on a tight budget, ask your broker which lenders offer lower progressive drawing fees or whether any fee waivers apply to your occupation.

Only Interest on the Amount Drawn Down Is Charged During Construction

During the construction phase, you only pay interest on the amount that has been drawn down, not the full loan amount. If your total construction loan is $500,000 but only $200,000 has been released to the builder, your interest is calculated on $200,000. This keeps your repayments lower while the build is underway.

Once construction is complete and the final drawdown is made, the loan converts to a standard home loan with principal and interest repayments, unless you have arranged interest-only repayment options. The conversion happens automatically, and your repayment amount will increase to reflect the full loan balance. If you are working rotating shifts and need flexibility around your repayment structure during construction, discuss it with your broker before you sign the loan documents. Some lenders offer more flexibility than others, particularly for detectives and other law enforcement professionals.

Call one of our team or book an appointment at a time that works for you. We will walk you through the compliance requirements that apply to your build and make sure your contract, council approval, and builder documentation are ready before your application is submitted.

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