Construction Finance
Are Construction Loans Interest Only?
5 min read- Finance Guide
- Updated 2026
Quick answer
During construction, repayments are often
Interest Only
on funds drawn during the building phase
- During construction Commonly interest only
- After completion Often converts to P&I
- Interest charged on Funds used, not full limit
1300 421 044
1300 421 044
Detailed explanation
A construction loan is not always interest only forever, but it is very often interest only while the build is underway. The reason is practical: the loan is drawn in stages, the home may not yet be livable, and the lender is generally trying to align repayments with the progressive release of funds.
Why interest only is commonly used
Repayments are usually lighter during the build because funds are staged
- 01Only part of the total facility is drawn at first
- 02Interest is usually charged on the drawn balance only
- 03Repayments generally rise as more progress payments are made
- 04The property may not yet be ready to occupy or rent
- 05Cash flow pressure is often higher during the building period
- 06After completion, the loan often rolls to standard repayments
At each stage:
The builder submits a progress claim- The lender confirms that stage is complete
- Funds are released for that stage only
- Interest is then charged on the updated drawn balance
How repayments usually change
Typical repayment flow on a construction loan:
-
Repayments are commonly interest only while construction is underway
-
Interest is usually charged only on the amount already drawn
-
Repayments can increase gradually as each progress payment is released
-
Once the build is finished, many loans revert to principal and interest
-
Some lenders may consider a further interest only period, but this is separate to the normal construction phase
Repayment stages
-
Early build
Lowest balance
-
Mid build
More funds drawn
-
After completion
P&I often begins
What lenders usually assess
Lenders review
Whether the build is at an early, mid or late stage- How much of the approved facility has already been drawn
- Whether the contract, plans and progress claims still align
- Updated value and remaining cost to complete
- Borrower serviceability under current rates and policy
- Any cost overruns, delays or changes to the builder
- How the loan will be structured once construction ends
Typical repayment pattern
-
Construction phase
Commonly interest only
-
Interest basis
Usually on funds drawn
-
After completion
Often principal and interest
-
Further IO period
Possible, subject to policy
Need Help with your Project?
Common problems
Construction loans can become more complicated when borrowers assume they will stay interest only for the whole loan term or when build delays, cost increases, or policy changes affect the repayment structure.
The loan does not stay interest only after completion
Many borrowers expect the construction loan to remain interest only, but many lenders switch it to principal and interest once the build is finished.
Possible solutions include:
Check the repayment type before signing loan documents- Model repayments after completion, not just during the build
- Ask whether a separate interest only period is available after build
- Refinance after completion if another structure suits better
Repayments rise as more funds are drawn
Even while the loan is interest only, repayments usually increase over time because each draw raises the balance on which interest is charged.
Possible solutions include:
- Allow for higher repayments at later build stages
- Keep contingency funds for overruns and delays
- Track progress claims and lender draw timing closely
- Stress test the budget against higher rates
Delays can extend the interest only phase
Build delays may extend the construction period, meaning the interest only stage lasts longer and total interest paid may increase.
Possible solutions include:
- Check the lender maximum build timeframe
- Keep documents current if the lender requests updates
- Manage variations carefully to avoid reassessment issues
- Review the end loan structure before practical completion
Steps to get Finance
Step
01
Confirm whether the lender offers interest only during construction.
Step
02
Review how interest is charged on progressive drawdowns.
Step
03
Model repayments at early, mid and late build stages.
Step
04
Check what repayment type applies after completion.
Step
05
Monitor drawdowns and interest only repayments during the build.
Step
06
Review whether to keep, switch or refinance the loan once the build ends.
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