Calculating The Interest On Your Progress-Payment Construction
If you're building a new home using a progress-payment construction contract, it’s important to understand how interest costs build up throughout the project. Unlike a turn-key contract—where you pay a deposit and then settle in full when the home is completed—progress-payment contracts involve staged payments as the build progresses. That means you'll start paying interest on your loan from the very first drawdown. So how do you calculate what that interest will look like over the course of your build?
Why Progress-Payment Contracts Involve Interest Costs
In a turn-key contract, the builder carries the cost of the project during construction. You simply pay a deposit (usually 10%) and the rest when the home is ready to move into. With a progress-payment contract, however, you settle the land purchase early and then begin paying your builder in instalments as each stage of the construction is completed. As your loan grows with each payment, your interest costs grow as well.
A Simple Example: How the Numbers Work
Let’s imagine you’re building a home where the section costs $300,000 and the build will cost $400,000. The builder estimates the home will take 12 months to complete, and your interest rate is 6%.
From the day you settle on the section, you’ll begin paying interest on the $300,000. At 6%, that comes to approximately $18,000 over the 12-month period. The build portion is drawn down over time, which means you won’t be paying interest on the full $400,000 straight away. A useful method is to assume you'll owe an average of half the build cost throughout the construction—so, in this case, $200,000. At 6% interest, that would cost you roughly $12,000 over the year.
This gives us a total interest estimate of $30,000 for the 12-month build—$18,000 on the section and $12,000 on the construction drawdowns.
Don’t Forget to Budget for Delays
Construction timelines often blow out. Whether it’s delays at council, bad weather, or labour shortages, your 12-month build could easily stretch to 15 or 18 months. Because of this, we recommend allowing an additional 50% on your estimated interest. If your original estimate was $30,000, you might want to budget closer to $45,000 just to be safe. It’s better to overestimate and have money left over than to be caught short halfway through your build.
Can You Borrow the Interest Costs?
If you have a 20% deposit (or the equivalent in usable equity), most banks will allow you to borrow slightly more to cover the interest during the build. This can be especially helpful for first home buyers who are already paying rent while the construction is underway. In our example above, the total cost of land and construction is $700,000. If you have $185,000 in savings, you could use $140,000 as your 20% deposit and reserve $45,000 to cover interest over the build. The bank would lend the remaining $560,000.
Recap: How to Estimate Your Construction Interest Costs
To estimate your interest costs, first identify the land price, the build cost, and the expected duration of the project. Then calculate the interest on the full section cost over the expected timeframe. For the build portion, estimate interest on half of the total construction cost. Add both amounts together and then allow for additional time to cover potential delays—typically multiplying by 1.5 is a good safety net. This approach will give you a realistic interest estimate to factor into your overall budget.
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