Understanding Progress Payments in Construction Loans

By Deltos Finance on September 12, 2023
construction loans guide

Imagine standing on an empty plot of land, envisioning your dream home taking shape — every detail meticulously designed to reflect your style and aspirations. The excitement surges through your veins, but amidst the thrill, you can’t ignore the critical financial considerations that lie ahead, especially when it comes to securing construction loans. You might also wonder when exactly you can get “progress payments” to fund your project. So today, we’ll walk you through the concept of progress payments in construction loans, providing valuable insights & tips along the way. 

What Are Progress Payments in Construction Loans?

Progress payments, also known as construction draw downs, are a financing mechanism used in construction loans. Unlike standard home loans, where the full loan amount is disbursed upfront, construction loans are divided into multiple stages, with funds released incrementally as your dream home’s construction progresses. 

Indeed, progress payments are a unique aspect of construction loans, so understanding them is crucial for borrowers like you. That way, you can avoid unnecessary delays that can affect the schedule of your progress payments. 

The Mechanism of Progress Payments

How do progress payments work? What can you expect throughout the project? Let’s illustrate the mechanism of progress payments in construction loans in Australia.

  • Preparing the Draw Down Schedule: Before construction commences, the lender and the borrower establish a detailed draw down schedule that outlines the construction’s different stages. Each stage represents a milestone, such as site preparation, foundation pouring, framing completion and interior finishing.
  • Valuation and Inspection: When a particular construction stage is completed, a qualified valuer or inspector assesses the work to ensure compliance with the construction plan and relevant building codes. The lender may require the borrower to submit a progress payment request, along with supporting documentation from the builder or contractor, to initiate the valuation and inspection process.
  • Disbursement of Funds: Upon the construction stage approval, the lender disburses the funds required to cover the cost of the completed work. This amount, known as the progress payment, is directly paid to the builder or contractor responsible for the construction.
  • Iterative Process: The process of progress payments repeats for each construction stage until the entire project is completed. As the construction progresses, the borrower gradually accesses more funds to finance the upcoming stages.

The Advantages of Progress Payments

Exploring the option between construction loans and other types of loans? You should know that progress payments offer several benefits for both borrowers and lenders in the Australian real estate market. Here are some of them:

  • Cost Control: Through releasing the funds incrementally, progress payments help control costs, minimising the risk of financial strain on the borrower and ensuring adequate financing for each stage.
  • Enhanced Oversight: The staged payment system allows lenders to monitor the construction progress closely. That way, they ensure the funds are utilised efficiently and that the project remains on track.
  • Flexibility for Borrowers: Borrowers can make payments for completed stages without the burden of paying interest on the entire loan amount from the beginning, providing flexibility in managing their finances. Also, construction loans are generally interest-only loans for the duration of the construction. 
construction progress payments

Essential Tips for Navigating Progress Payments in Construction Loans

Understanding the ins and outs of progress payments is crucial to ensure a smooth and successful home-building process. Here are more tips to help you:

Partner with Experienced Professionals

Collaborate with reputable builders and knowledgeable lenders who are well-versed in construction loans and progress payments. Their expertise will prove invaluable in ensuring a seamless and hassle-free home-building process.

Maintain Regular Communication

Foster open and transparent communication with your lender and builder throughout the construction journey. Keeping all parties informed about progress and payment schedules fosters a collaborative environment and lowers the risk of misunderstandings.

Seek Expert Guidance

Building your dream home is a significant undertaking, and seeking expert guidance can alleviate uncertainties and streamline the process. Deltos Finance, a leading mortgage broking company in Hobart, offers specialised assistance with construction loans and progress payments, tailoring solutions for your unique needs.

Summing It Up

Beyond just a financial concept, progress payments symbolise the stepping stones of your dream home, where each instalment breathes life into the walls and foundation of your vision. Ready to utilise progress payments and apply for construction loans in Hobart? Get in touch with Deltos Finance today. 

Our construction loan brokers are ready to help explain progress payments more in detail and guide you throughout your construction loan application. With Deltos Finance as your partner, every step of the way is meticulously supported, ensuring your dream home becomes a masterpiece, crafted with care, passion and a vision uniquely yours.

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