The easiest way to avoid construction loan risks

Construction loans release funds in stages as your build progresses, which means the risk sits with you if something goes wrong between those payments.

If you're building a new home in Marrickville, you're likely drawn to the idea of a custom design on a block that suits the neighbourhood's character. But construction finance works differently to a standard home loan, and the risks are different too. The lender doesn't hand over the full loan amount upfront. They release funds progressively as the builder completes each stage, and if the builder stops work, goes into liquidation, or the project runs over budget, you're the one who needs to manage it.

Why construction loans carry more risk than standard home loans

With a standard home loan, the property is complete when you settle. With construction finance, you're borrowing against something that doesn't exist yet. The lender assesses your application based on the land value, the building contract, and your ability to service the loan amount once the build is finished. If the project stalls or costs increase, the lender's security is incomplete, and your financial position becomes more complicated.

Consider a buyer building a dual-level home on a subdivided block near Addison Road. The building contract is set at a fixed price, the land is owned, and the lender approves a construction loan with a progressive drawdown. Four months in, the builder requests the third progress payment, but the work doesn't match the stage described in the contract. The buyer refuses to sign off, the builder stops work, and the lender won't release further funds until the dispute is resolved. The buyer is now paying interest on the amount already drawn down, the build is stalled, and they're still renting.

Fixed price contracts don't always protect you

A fixed price building contract sets the total cost upfront, which sounds reassuring. But fixed price doesn't mean the contract can't change. Most contracts include clauses for variations, which allow the builder to charge extra if you request changes, if council plans require updates, or if unforeseen site conditions arise. A variation might add five or ten thousand dollars to the build, but if you've already borrowed to your limit, you'll need to cover that gap yourself or renegotiate your loan.

In Marrickville, where older blocks often have quirky drainage, soil issues, or heritage overlays, variations aren't uncommon. The contract might also include a provisional sum for items like landscaping or driveways, which means the builder has estimated a cost but can adjust it once the work is done. If the actual cost is higher, you'll be invoiced for the difference, and that comes out of your own savings unless you've built a buffer into your borrowing.

What happens if your builder goes into liquidation

If your registered builder goes into liquidation mid-build, the lender will stop releasing funds and you'll need to find another builder to complete the work. The new builder will assess what's been done, what's been paid, and what's left to finish. In many cases, the remaining loan funds aren't enough to cover completion because the original builder was paid for stages that weren't finished to standard, or because the new builder's quote is higher.

You may have access to statutory warranties or insurance that covers incomplete work, but claiming on those can take months, and you're still liable for your loan repayments in the meantime. The lender won't pause your interest charges just because the build has stopped. You'll be paying interest on the amount already drawn down, and if you're still renting or paying a mortgage on another property, that creates serious cash flow pressure.

Cost plus contracts shift even more risk to you

Some builders offer a cost plus contract, where you pay the actual cost of materials and labour plus a margin for the builder. This structure is common for custom builds or owner builder arrangements, but it means there's no fixed price. The builder invoices you for costs as they're incurred, and if materials go up or the build takes longer than expected, you wear that risk entirely.

Lenders are cautious with cost plus contracts because there's no clear cap on the final amount. They'll typically lend a lower percentage of the estimated build cost, and they'll scrutinise the progress payment schedule more closely. If you're building in an area like Marrickville where site access can be tight and council approval processes can add time, a cost plus contract can become difficult to manage without a substantial contingency fund.

How progress payment schedules affect your cash flow

Most construction loans involve five or six progress payments tied to specific stages: slab down, frame up, lock-up, fixing, practical completion. The builder requests each payment once that stage is done, and the lender arranges a progress inspection before releasing the funds. But builders often ask for payment before the stage is fully complete, or they might include materials on site as part of the stage value even if they haven't been installed yet.

If you approve a payment and the work isn't actually finished, you've used up part of your loan without getting the corresponding value. That creates a gap between what you've paid and what you've received, and if the builder doesn't return to finish the stage, you're left covering the shortfall. Lenders charge a Progressive Drawing Fee each time they release funds, usually between $300 and $500 per drawdown, which adds to your upfront costs.

Interest charges start as soon as funds are drawn

Unlike a standard home loan where you borrow the full amount at settlement, construction finance only charges interest on the amount drawn down so far. That sounds helpful, but it also means your repayments increase with every progress payment. Most construction loans offer interest-only repayment options during the build, but you're still making those payments while you're also paying rent or managing another mortgage.

If the build runs over time, which is common, you're paying interest for longer than expected. A six-month build that stretches to nine months means an extra three months of interest, and if your loan reverts from a discounted construction loan interest rate to a higher ongoing rate after a set period, the cost compounds further.

Development application delays and council approval

Before the build can start, you'll need council approval, and in Marrickville, that process can take longer than you expect. The area has heritage considerations, zoning overlays, and a council that's particular about streetscape and environmental impact. If your development application is refused or requires amendments, your construction loan approval might expire before you can even commence building.

Most lenders require you to commence building within a set period from the Disclosure Date, often six months. If council delays push you past that window, you'll need to reapply for finance, and if your circumstances have changed or lending policy has tightened, you might not get the same loan amount or interest rate you were originally approved for.

When to walk away from a contract

If a builder's quote seems unusually low, or if they're unwilling to provide a detailed breakdown of costs, that's a warning. The same applies if they're pushing you to sign off on progress payments before the work is genuinely complete, or if they're asking for large upfront deposits that aren't in line with the standard progress payment finance structure.

You're better off delaying the build and finding a different registered builder than committing to a contract that puts you at financial risk. A construction loan application is only as solid as the building contract behind it, and if that contract is vague, incomplete, or weighted too far in the builder's favour, the lender will pick it up during assessment, and you'll end up renegotiating or starting again anyway.

If you're building in Marrickville and want to make sure your construction funding is set up properly, call one of our team or book an appointment at a time that works for you.

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