Construction Loan Fees to Expect When Building

Construction finance carries additional fees beyond what you'd pay on a standard home loan, and understanding these upfront costs helps you budget accurately for your project.

Building in Bentleigh East typically means navigating council approval processes specific to the Bayside and Glen Eira council areas, and your construction funding structure needs to align with those timelines. The fees attached to construction loans differ from standard home loans because lenders manage multiple inspections, progress payments, and additional risk assessment throughout the build period.

Application and Approval Fees

Most lenders charge an application fee for construction finance, typically ranging from $600 to $1,200. This covers the cost of assessing your project, including the review of council plans, building contracts, and the registered builder's credentials. Some lenders waive this fee as part of promotional offers, but you should confirm whether any waived fee reappears as a higher interest rate over the loan term.

Your lender will also review the fixed price building contract and verify that your registered builder holds appropriate insurance and licensing. If you're planning an owner builder project, expect additional scrutiny and potentially higher fees, as lenders view these arrangements as higher risk.

Progressive Drawing Fees: The Largest Ongoing Cost

Lenders charge a Progressive Drawing Fee each time they release funds to your builder at key construction milestones. This fee covers the cost of sending a qualified inspector to verify that the work has been completed to the required standard before releasing payment. Expect to pay between $300 and $500 per inspection, with most residential builds requiring five to seven inspections from slab stage through to practical completion.

Consider a scenario where you're building a custom home in Bentleigh East near the Centre Road precinct. Your construction draw schedule includes six progress payments: base stage, frame stage, lock-up stage, fixing stage, practical completion, and final completion. At $400 per inspection, you're paying $2,400 in progressive drawing fees alone. These fees are separate from your loan amount and typically paid upfront at each drawdown, so factor them into your cash flow planning throughout the build.

Some lenders bundle progressive drawing fees into a single upfront charge ranging from $1,500 to $2,500, regardless of how many inspections occur. This structure can provide certainty for budgeting but may cost more if your build proceeds smoothly with fewer than six drawdowns.

Valuation Fees for Land and Construction Packages

Your lender requires two separate valuations when you're financing a land and construction package: one for the land at purchase and another for the completed property value. Each valuation typically costs between $300 and $600, depending on the property location and complexity.

In Bentleigh East, where block sizes vary significantly between older subdivisions near the railway line and newer developments closer to Princes Highway, the valuer needs to assess comparable sales for both the land component and projected completed value. If you're building a two-storey custom design home rather than a standard project home, expect the valuation process to take longer and potentially cost more due to the increased assessment complexity.

Interest Capitalisation and Holding Costs

During construction, you only pay interest on the amount drawn down at each stage, not the full loan amount. However, many lenders allow you to capitalise this interest, meaning it's added to your loan balance rather than paid in cash during the build. While this preserves your cash flow during construction, it increases your final loan amount and the total interest you'll pay over the life of the loan.

Some lenders charge a fee to set up interest capitalisation, typically $200 to $400, while others include it as a standard feature of construction funding. If you choose to make interest-only repayment options during construction without capitalising, you'll need to budget for these payments from your own funds while also covering rent or your existing mortgage if you haven't yet sold your current property.

Fixed Price Contract vs Cost Plus Contract: Fee Implications

Your contract type directly affects the fees and structure of your construction finance. Most lenders strongly prefer fixed price building contracts because they provide certainty around the final loan amount. With a fixed price contract, your lender knows exactly how much will be drawn at each stage, making the approval process more straightforward and often resulting in lower fees.

A cost plus contract, where you pay for actual costs plus a builder's margin, introduces variability that lenders view as higher risk. Expect to pay additional assessment fees, potentially higher interest rates, and more stringent progress inspection requirements if you proceed with this contract structure. Some mainstream lenders won't offer construction loans for cost plus contracts at all, limiting your options to specialist lenders with higher fee structures.

Council and Development Approval Costs

While not charged by your lender, council approval fees form part of your total project cost and affect your loan amount. In Glen Eira, where much of Bentleigh East falls, planning permit fees start around $1,600 for a standard residential dwelling, with building permit fees calculated based on the cost of works. For a typical new home build valued at construction cost, expect combined council fees between $3,000 and $5,000.

Your lender requires evidence of council approval and a valid building permit before approving your construction funding. Some lenders will provide pre-approval based on submitted plans, but won't release the first drawdown until you provide the building permit and evidence that construction has commenced within the required timeframe, typically six to twelve months from loan approval.

Ongoing Account and Service Fees

Construction loans convert to standard home loans once building reaches practical completion, but during the construction phase, some lenders charge monthly account keeping fees ranging from $10 to $30. These fees are separate from the interest charges and continue until your loan converts to a construction to permanent loan structure.

If you're building on land you already own and need to coordinate settlement of the land purchase with construction commencement, some lenders charge a split settlement fee, typically $300 to $500, to manage the two-stage funding process. This applies particularly when you're purchasing a house and land package where the land and construction contracts settle at different times.

Discharge and Early Repayment Considerations

If your build completes ahead of schedule and you want to refinance to a lender offering a lower interest rate, your construction lender may charge a discharge fee, typically $300 to $500. Some lenders also include clauses preventing early repayment or refinancing within the first twelve months without penalty, particularly if they've waived application or valuation fees upfront.

Read your construction loan contract carefully before signing, particularly the sections covering additional fees for variations to the building contract, extensions to the construction timeline, or changes to the progress payment schedule. These variation fees can add several hundred dollars to your costs if your build encounters delays or you make design changes after loan approval.

Construction finance involves more fees than standard home loans because lenders actively manage risk throughout your build. Understanding these costs upfront helps you maintain sufficient cash reserves and avoid surprises during the construction process. Call one of our team or book an appointment at a time that works for you to discuss how construction funding works for your specific project in Bentleigh East.

Frequently Asked Questions