Construction Finance
How Interest Is Calculated During Construction
5 min read- Finance Guide
- Updated 2026
Quick answer
Interest is usually charged on the drawn balance only
1 Daily calculation
Charged monthly while progress payments are released over time
- During construction Usually interest only
- Calculation basis Amount actually drawn
- Charging frequency Commonly monthly
- After final draw Usually converts to full repayments
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1300 421 044
Detailed explanation
Construction loan interest is different from a standard home loan because the full debt is not normally used on day one. Instead, the lender advances funds progressively as the build reaches each approved stage. As a result, interest is usually lower at the start of the project and increases as more of the loan is drawn.
What affects the interest charged
Construction loan interest commonly depends on:
the interest rate on the loan- the amount drawn at each stage
- the date each progress payment is released
- whether interest is paid monthly or capitalised
- how long construction takes to complete
This is why two projects with the same facility limit can produce different interest costs if their draw schedule or construction timing is different.
How the balance usually builds
Most construction loans follow standard stages, and the interest cost generally rises as each stage is funded:
- 01 Deposit
- →
- 02 Slab or base
- →
- 03 Frame
- →
- 04 Lock up
- →
- 05 Fixing
- →
- 06 Completion
At each stage:
Builder submits invoice or claim- lender confirms the stage is complete
- funds are released to the builder
- interest is then charged on the higher drawn balance
Interest and repayments
During construction
interest is often calculated daily on the loan balance owing- the charge is commonly debited or billed monthly
- repayments are usually interest only while building continues
- unused approved funds usually do not attract interest
After completion
-
the loan generally converts to the repayment type chosen at origination
-
full principal and interest repayments often begin after the final draw
-
some borrowers refinance once the build is complete and the property is revalued
Need Help with your Project?
Common problems
Interest during construction is often misunderstood because the approved limit, the drawn balance and the repayment type are not always the same thing.
Repayments rise as the build advances
Borrowers may budget for the starting repayment and forget that interest usually grows after each progress draw.
Possible solutions include:
- model the repayment at every draw stage
- keep a contingency buffer for timing delays
- check whether fees are added to the loan
- confirm when the final repayment type begins
Interest is confused with the total facility limit
Some borrowers assume interest is charged on the entire approved amount from day one, which is not how many standard construction loans work.
Possible solutions include:
- review the actual draw schedule
- separate approved funds from used funds
- ask how daily interest is calculated
- confirm how monthly interest is charged
Variations and delays increase interest cost
If the build runs over time or stage claims arrive later than expected, interest can continue longer and total holding costs can rise.
Possible solutions include:
- track variations closely with the builder
- allow for longer construction periods in budgeting
- keep extra funds available for overruns
- review refinance options after completion
Steps to get Finance
Step
01
Confirm the total project budget and how much funding is actually needed
Step
02
Obtain a fixed price build contract and expected draw schedule
Step
03
Check whether repayments are interest only, capitalised or fully serviced during build
Step
04
Model the monthly interest cost as the drawn balance increases
Step
05
Track every progress payment and confirm when interest changes
Step
06
Review the loan again at completion when full repayments usually begin
Speak With A Construction Loan Specialist
Interest during construction can look simple on paper but vary materially once stage payments, builder timing, capitalised fees and completion dates are taken into account.
A specialist can help map the likely repayment path before the first progress draw is released.
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Additional Questions
You may also find these questions helpful
-
01do you pay interest on the full construction loan amount straight away
-
02are construction loan repayments interest only during the build
-
03how do progress payments change the interest charged
-
04what happens to repayments after construction is complete
-
05can construction loan interest be capitalised
