Do I pay interest during construction?

Interest is calculated on the amount actually advanced. If the lender has paid the land component and the slab stage, that is the balance you pay interest on. Each new draw increases it. Repayments are interest only through the build, typically twelve to twenty-four months, then the loan converts to principal and interest. Because the balance grows through the build, so does the repayment, and borrowers paying rent at the same time need to budget for the last few months when most of the loan is drawn.

Development facilities include an interest allowance calculated on the expected drawdown profile over the loan term. Interest accrues on the drawn balance and is capitalised, so no cash repayments are made. The capitalised interest is part of total development cost and sits inside the loan to cost limit, which means it reduces the funds available for construction. If the project runs late, the interest allowance runs out and the borrower funds the extra interest, or the facility must be increased.

A few lenders allow interest to be capitalised on residential construction loans, usually for a limited period, so the borrower makes no repayments while paying rent. The interest is added to the loan balance, which increases the end debt and must fit within the LVR. It is a cash flow tool rather than a saving, and it is not available at every lender.

Because interest is charged on a rising balance, total interest during a twelve month build is roughly half what it would be on the full loan for the same period. A $600,000 build component drawn evenly over twelve months at a 6.5 per cent rate costs around $20,000 in interest across the build, not $39,000. Delays extend that, which is why lenders and QS reports focus so hard on the program.