If you're planning to add a second storey or extend your Wentworthville home rather than move, a construction loan works differently to the home loan you're used to.
The main difference is that funds are released in stages as the building progresses, not as a lump sum upfront. You only pay interest on what's been drawn down, which keeps costs lower during the build. But if the structure isn't set up correctly from the start, you can end up paying more than you should or scrambling to cover gaps between progress payments and what the lender releases.
Missing the Link Between Council Approval and Loan Timing
Your lender needs council-approved plans before they'll issue formal loan approval. If you apply for finance before your development application is lodged or approved, you'll face delays that push back your build start date and can affect builder availability.
Consider a homeowner in Wentworthville who wanted to add a granny flat and upper-level extension to a post-war brick home. They approached their bank early, assuming conditional approval would hold while they finalised plans. The bank required stamped drawings and a fixed price building contract before moving forward. The delay added six weeks to the timeline, and by the time approval came through, their builder had moved to another job. They had to renegotiate the contract at a higher rate.
Start the DA process early, especially in Wentworthville where properties near the railway line or within heritage conservation areas can require additional submissions. Once you have council approval and a signed contract with a registered builder, the loan application can move forward without unnecessary hold-ups.
Choosing a Cost Plus Contract Without Understanding Draw Timing
A cost plus contract gives you flexibility on design decisions during the build, but it creates complications with progress payment finance. Lenders release funds based on a fixed schedule tied to construction stages. If costs shift or blow out mid-build, the lender won't automatically increase the drawdown amount.
Under a fixed price building contract, the builder and lender agree upfront on how much gets released at each stage: slab, frame, lockup, fixing, and completion. The amounts are predictable. With a cost plus arrangement, the final cost isn't locked in, so the lender uses an estimate. If the actual cost at lockup exceeds what was estimated, you'll need to cover the gap with your own funds before the next stage can proceed.
If you're doing a renovation or extension with a lot of unknowns, such as underpinning an older Wentworthville home or dealing with asbestos removal, a cost plus contract might still make sense. Just make sure you have a buffer in savings to cover variation costs that fall outside the original loan amount.
Underestimating How Interest Accrues During Construction
During the building phase, most construction loans operate on interest-only repayments. You're only charged interest on the amount drawn down so far, not the full loan amount. But each time a progress payment is made, the balance increases and so does the monthly interest.
If your extension is expected to take six months and the loan amount is drawn progressively, your repayments will steadily climb each month. Some borrowers assume the repayment stays flat until the build finishes, then get caught out when the amount doubles halfway through.
Plan your household budget around increasing repayments during construction. Your broker can give you a drawdown schedule that shows approximately how much will be released at each stage and what the corresponding interest repayment will be. That way, there's no surprise when the amount jumps after the frame inspection or lockup.
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Ignoring the Progressive Drawing Fee
Every time the lender releases funds to your builder, they charge a progressive drawing fee. Depending on the lender, this can be between $300 and $500 per drawdown. Over five or six progress payments, that adds up to a few thousand dollars you need to factor into your budget.
Some lenders also require a progress inspection before releasing each payment. The inspection is done by a third-party valuer or building consultant who confirms the stage is complete. The cost of these inspections is either bundled into the drawing fee or charged separately, depending on the lender's structure.
If you're doing a smaller extension, such as adding a single bedroom and ensuite to the back of your Wentworthville home, the number of progress payments might be reduced to three or four stages instead of the standard six. That lowers the total fee cost, but you'll need a builder who's comfortable with a modified progress payment schedule.
Not Switching to Principal and Interest Repayments After Completion
Once construction is finished and the final drawdown is made, your loan needs to convert from construction mode to a standard home loan with principal and interest repayments. Some lenders do this automatically. Others require you to submit a completion certificate and request the conversion manually.
If the conversion doesn't happen, you'll stay on interest-only repayments indefinitely. That might sound appealing in the short term because the repayment is lower, but you're not reducing the loan balance. Over time, you'll pay significantly more in total interest and still owe the full amount when the interest-only period expires.
Make sure your broker confirms how the conversion process works with your lender and what documentation is required. The builder will provide a completion certificate once the final inspection is done. That document triggers the switch to principal and interest repayments and also allows you to access any offset account or redraw facility linked to the loan.
If you're planning to refinance after the build to access equity or shift to a better rate, wait until the loan has fully converted and the property has been revalued with the completed extension included. Refinancing mid-construction creates unnecessary complications and most lenders won't proceed until the build is finished.
Wentworthville's proximity to Parramatta and Westmead means many homeowners are choosing to extend rather than move, particularly on larger blocks near Wentworthville Park or along the northern side of the suburb where lot sizes are more generous. If you're in that position and want to make sure your construction loan is structured correctly from the start, call one of our team or book an appointment at a time that works for you.
Frequently Asked Questions
How does a construction loan differ from a standard home loan?
A construction loan releases funds in stages as the building progresses, not as a lump sum. You only pay interest on the amount drawn down so far, which keeps costs lower during the build. Once construction finishes, the loan converts to a standard home loan with principal and interest repayments.
What documents do I need before applying for a construction loan?
You'll need council-approved plans, a signed fixed price building contract with a registered builder, and proof of how much the project will cost. Without these, the lender can't issue formal approval or set up the progress payment schedule.
What is a progressive drawing fee?
A progressive drawing fee is charged by the lender each time they release funds to your builder during construction. It typically ranges from $300 to $500 per drawdown and covers the cost of processing the payment and arranging progress inspections.
Can I use a cost plus contract with a construction loan?
Yes, but it creates complications because the final cost isn't fixed. Lenders release funds based on an estimated schedule, so if costs exceed the estimate, you'll need to cover the gap with your own funds. A fixed price contract is more predictable for progress payment finance.
What happens to my loan repayments during construction?
During construction, most loans operate on interest-only repayments. The repayment amount increases each time a progress payment is made because you're charged interest on the growing balance. Once the build is complete, the loan converts to principal and interest repayments.
