Top Strategies to Manage Construction Loan Fees

Construction loan fees can add several thousand dollars to your project costs if you're not prepared for them.

When you're buying your first investment property and building from scratch, the fee structure works differently to a standard home loan. You'll pay for valuations at each stage of the build, progress inspections, and often a separate establishment fee. Some lenders also charge what's called a Progressive Drawing Fee each time funds are released to your builder. Knowing what to expect means you can factor these costs into your initial budget rather than scrambling to cover them mid-project.

What You'll Pay Upfront Before the Build Starts

Most lenders charge an establishment fee when you settle on a construction loan, typically between $500 and $1,200. This fee covers the administrative work of setting up a loan that will be drawn down in stages rather than as a single lump sum. You'll also pay for an initial valuation of the land and the proposed build, which usually costs between $300 and $600 depending on the location and complexity of the project.

Consider a scenario where you've secured suitable land in Mulgrave and you're working with a registered builder on a fixed price building contract. The lender will want to see council approval, the signed building contract, and detailed council plans before they'll approve the loan. That initial valuation assesses whether the finished property will be worth what you're spending on the land plus the build. If the valuer believes the completed home will be worth less than your total outlay, the lender may reduce the loan amount or decline the application altogether.

Progressive Drawing Fees and How They Add Up

A Progressive Drawing Fee is charged each time your builder requests a progress payment. Most builds follow a five-stage payment schedule, though some lenders and builders use six or seven stages. Each time funds are released, the lender charges a fee that typically ranges from $200 to $400.

If your builder is working through a standard five-stage drawdown on a house and land package, you could pay between $1,000 and $2,000 in drawing fees alone. The construction draw schedule usually includes payments at slab down, frame up, lockup, fixing stage, and practical completion. At each stage, the lender arranges a progress inspection to confirm the work has been completed to the required standard before releasing funds. That inspection is often included in the drawing fee, though some lenders charge separately for it.

In our experience, investors underestimate how quickly these fees accumulate, particularly if there are delays that push the build beyond the expected timeline. We regularly see projects in areas like Glen Waverley or Mount Waverley where a six-month delay leads to additional holding costs on top of the drawing fees already paid. The lesson is to build a buffer into your budget from the start.

Interest Charges During Construction

Unlike a standard home loan where you start making principal and interest repayments immediately, construction loans only charge interest on the amount drawn down at each stage. This can work in your favour because you're not paying interest on the full loan amount while the build is in progress.

Most lenders offer interest-only repayment options during the construction phase, meaning you only pay the interest component each month without reducing the loan balance. Once the build reaches practical completion and you've made the final progress payment, the loan converts to a standard principal and interest loan unless you arrange otherwise.

The construction loan interest rate is often slightly higher than a standard variable rate, typically by 0.10% to 0.30%. That difference might sound small, but it applies to the drawn balance from day one. If you've drawn down $200,000 by the lockup stage and the build stalls for three months due to weather or material delays, you're paying interest on that amount for the entire delay period.

Valuation Fees at Practical Completion

Once your builder confirms practical completion, the lender will arrange a final valuation to verify the property is finished and matches the approved plans. This valuation typically costs between $300 and $600, similar to the initial assessment. The final valuation is important because it determines whether the lender will release the last progress payment and convert the loan to a standard investment loan.

If the valuer identifies incomplete work or variations from the approved plans, the lender may withhold funds until the builder rectifies the issues. This can create tension if your builder is waiting for that final payment to complete minor touch-ups or landscaping. It's one reason why working with a registered builder on a fixed price contract reduces risk compared to a cost plus contract, where variations can blow out the budget and complicate the final valuation.

Fees You Can Negotiate or Avoid

Some lenders waive the establishment fee if you're refinancing other debt to them or if you're borrowing above a certain threshold. It's worth asking whether the fee can be reduced or rolled into the loan amount, particularly if you're managing cash flow across land purchase, deposit, and settlement costs.

Progressive Drawing Fees are harder to negotiate, but some lenders cap them or offer a flat fee structure instead of charging per drawdown. If you're comparing lenders, ask for a breakdown of all fees across the full construction period, not just the headline interest rate. A lender advertising a lower construction loan interest rate might charge higher drawing fees that wipe out any savings.

You can also reduce costs by ensuring your builder submits accurate progress claims that align with the agreed payment schedule. If a builder requests a drawdown before reaching the next stage, it can trigger additional inspections and fees. Clear communication between you, your builder, and your broker helps avoid unnecessary costs.

Budgeting for the Total Fee Structure

When you're putting together your initial budget, include at least $3,000 to $5,000 for construction loan fees on top of your land purchase costs, builder's contract price, and any site preparation work. This covers establishment fees, drawing fees, and valuations.

If you're building under a house and land package arrangement, the developer or builder may have a preferred lender who is familiar with the project and may offer reduced fees. However, you're not locked into that lender. A mortgage broker who works with construction finance regularly can often find a lender with a better overall fee structure, particularly if your situation involves less common scenarios like owner builder finance or a renovation project on an existing investment property.

Factoring these fees into your upfront costs also affects how much you need in genuine savings. Lenders want to see that you can cover not just the deposit on the land but also the fees and costs that arise before the first drawdown. If you're using equity from another property to fund the build, make sure the amount you're releasing covers the full fee structure, not just the land and contract price.

What Happens If You Need to Access Extra Funds Mid-Build

If your build costs increase due to unforeseen site conditions, council requirements, or variations you request during construction, you may need to increase your loan amount. Most lenders will require a revaluation and reassessment of your borrowing capacity before approving additional funds. This can add another $300 to $600 in valuation fees and potentially a variation fee from the lender.

Some builders include a contingency amount in the fixed price building contract to cover minor variations, but structural changes or upgrades usually fall outside that buffer. If you're planning a custom design or a build on a sloping block that may require additional earthworks, discuss potential variation costs with your builder before signing the contract. Knowing the likely range helps you decide whether to borrow a slightly higher amount from the start or keep funds in reserve.

Call one of our team or book an appointment at a time that works for you. We'll walk through the full fee structure based on your specific build, location, and lender options, so you know exactly what to budget for before you commence building within a set period from the Disclosure Date.

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