How do progress payments work on a knock down rebuild?

Residential building contracts in Australia use fairly standard stages. The deposit is capped by state law (5% in Victoria and Queensland for contracts of $20,000 or more, 10% in NSW). After that a typical split is base or slab 10 to 15 per cent, frame 15 to 20 per cent, lock-up 30 to 35 per cent, fixing 20 to 25 per cent and completion 10 to 15 per cent. The exact figures are in your contract and the lender approves the schedule as part of the loan.

If you are contributing cash to the build, most lenders require your contribution to be spent before they release loan funds. So the deposit and possibly the slab stage come from you, and the lender starts paying from frame onwards. If your contribution is entirely equity in the land there is nothing to spend first and the lender funds from the first stage.

Draws are delayed when the inspection finds the stage incomplete, when the invoice does not match the contract schedule, when a variation has been agreed with the builder but not with the lender, or when insurance certificates have lapsed. Variations are the big one: an approved variation that adds $30,000 to the contract needs the lender's approval and may need a revised valuation before it can be funded. Builders charge interest on late payments, so keep the lender informed of any change as soon as it is signed.

You pay interest only on the drawn balance. Early in the build that is the refinanced land debt plus the first stage or two; by fixing stage it is most of the loan. Some lenders allow interest to be capitalised into the loan during construction, which helps if you are also paying rent, but it increases the end balance.