Construction loan calculator

What the construction loan calculator is working out

Interest is charged on the drawn balance and nothing else. Money still sitting with the lender costs you nothing, which is the whole reason a build is funded in stages rather than handed over at settlement.

Take an example: $300,000 of land debt already drawn, a $400,000 build, 7%, ten months, and four progress draws of $100,000 released in the first, fourth, seventh and tenth months. The balance steps up four times and the monthly cost steps up with it.

Add the column up and the build costs $30,333.33 in interest. The first month is $2,333.33 and the last is $4,083.33, so you finish paying 1.75 times what you started on, with an average across the build of $3,033.33 a month.

There is a quick way to sanity check any figure this tool gives you. The average drawn balance across those ten months is $520,000, and $520,000 at 7% for ten months is $30,333.33. If your own numbers do not tie out that way, one of the inputs is wrong.

The one assumption this tool makes about your progress draws

The calculator splits your build cost into equal draws and spaces them evenly across the build period. Your real progress payment schedule will do neither. The stages are set by your building contract, they are different sizes, and they do not arrive at tidy intervals.

We looked for a stage schedule that applies to every building contract and there is not one. Rather than print a table of percentages that would be right for some readers and quietly wrong for the rest, we have made the assumption visible and given you the two dials to work around it.

• Set the number of draws to the number of stages your contract actually names
• Set the build period to the program length written into the contract, not a guess
• If your schedule is back-loaded, with the larger payments late, the tool will overstate your interest
• If it is front-loaded, the tool will understate it, and that is the direction to be careful about
• Run it twice, at the contract program and at a couple of months longer, and treat the pair as your range

One useful thing falls out of the arithmetic here. On an even spacing, splitting that example $400,000 into anywhere from two draws to eight moves the total by about $556 out of $30,333, because the average drawn balance across the build barely shifts. How long the build runs does far more: stretch the same job from ten months to fourteen and the interest goes from $30,333 to $42,000.

How a progress drawdown actually works

Nothing is released because a date arrived. Each stage is claimed, checked and then paid, and the same short cycle repeats at every stage of the build.

1. 1

   The builder issues a progress claim

   A stage is finished and the builder invoices for the portion of the contract that covers it. That claim is the trigger for everything that follows.

2. 2

   The lender confirms the stage is complete

   A valuer or inspector is usually sent to verify the work has actually been done before any money moves. This is the step that takes time, and it is worth knowing about before your builder is standing around waiting.

3. 3

   You sign a drawdown authority

   The lender needs your instruction to release funds. It is a signature, but it is a signature nobody else can give, so being uncontactable for a week has a cost.

4. 4

   The lender pays the builder

   Funds go to the builder rather than to you, and your drawn balance rises by that amount. The next month's interest is calculated on the new, larger figure.

A stalled drawdown stalls the site, and a stalled site is the one thing on a build that costs money every single day. Keeping that cycle moving is most of what a broker does once a construction loan is settled.

Every authority you sign is a permanent step up in the monthly cost, not a temporary one. That is why the panel shows you the final month as well as the first.

The cash flow squeeze that catches people out

Here is the part that surprises almost every first-time builder. Through the entire build you are paying construction interest and paying to live somewhere at the same time, whether that is rent or the mortgage on the house you have not sold yet.

On the example above that is an average of $3,033.33 a month on top of your housing, finishing at $4,083.33 in the final month. The expensive months are the last ones, and they arrive when the project is already late and everyone is tired of it.

• The construction interest itself, which on the example is $30,333.33 across ten months
• Rent or an existing mortgage for every month the build runs, and for the weeks after it that settlement takes
• A contingency for the build running over, because the interest keeps accruing while it does
• The items sitting outside the building contract, which arrive at the end when cash is thinnest

Construction interest is a genuine cost of the project and it belongs in the project budget from the first spreadsheet, sitting beside the build cost rather than turning up as a surprise in month seven. Working out that number early is the entire point of this page.

What the lender funds, and what it does not

A construction loan is sized on the land plus the fixed price building contract, with the property valued as if it were already complete from the plans and that contract. The contract is the document doing the work. What is not in it is generally not being funded.

This is what makes variations awkward. A change you agree with your builder mid-build sits outside the contract the lender assessed, and it may not be added to the loan, which means finding the money in cash while you are already paying interest and rent.

• Landscaping and reticulation
• Driveways and paths
• Fencing and retaining
• Window treatments and floor coverings, depending on the contract
• Anything you plan to arrange yourself outside the builder's scope

This is also why the tool asks for a total build cost rather than a total project cost. Put the contract figure in, because that is what gets drawn down and charged interest, and keep everything above in a separate line of your own budget.

Why a building loan repayment calculator has to model two loans

At practical completion the facility stops being a construction loan. It converts to an ordinary principal and interest home loan over the term you entered, and the repayment steps up one final time, for a different reason than all the previous steps.

Carry the example forward. The last construction month costs $4,083.33; the principal and interest repayment on $700,000 at 7% over 30 years is $4,657.12. That is $574 more, a 14% rise, and it is almost exactly double what the very first month of the build cost you.

Nothing about the conversion is a surprise to the lender, but it surprises borrowers constantly, because the build has been budgeted at the early months rather than at the end state. Budget at $4,657.12, not at $2,333.33.

Owner-builder and knockdown-rebuild are the harder cases

Owner-builder projects can be funded and the lender market for them is much narrower, so the file needs an owner-builder approval, a properly detailed costing schedule and evidence you can cover a shortfall. A knockdown-rebuild adds demolition and any existing debt on the block into the same sum. Both are worth modelling here and then checking with a person, because the arithmetic is the easy half.

Whatever this page returns is an estimate built from what you typed, not an approval and not an offer. We are independent brokers with a panel of more than 40 lenders, and construction policy is one of the areas where they differ most, so a project one lender will not touch is routine for another. Ring us on 1300 813 113 before you sign a building contract, not after.