Discover how construction loan progress payments lower interest costs, improve cash flow, and ensure project quality at every stage.
Unlike traditional mortgages, where the entire loan amount is disbursed upfront, construction loans release funds in stages, known as progress payments. This approach offers a range of benefits that can protect your financial position and help ensure your project stays on track. Below, we’ll explore these benefits and how they can positively impact your bottom line.
Lower Interest Exposure: Pay Less While You Build
One of the standout benefits of progress payments in a construction loan is the way interest is charged. Rather than paying interest on the entire loan amount from day one, you’ll only be charged interest on the funds you’ve actually drawn down. This means your interest costs during the construction phase are significantly lower, helping you save money as the project progresses.
Example:
If you’re approved for a $500,000 loan but have only drawn down $100,000 so far, you’ll only pay interest on the $100,000, not the full amount. This approach can dramatically reduce your interest costs, leaving more room in your budget for other project expenses.
Key Benefits:
Reduced interest costs: You’re only charged for the portion of the loan that you’ve accessed.
Flexibility: The loan balance grows as needed, minimizing your debt burden during the early stages of the build.
Added Protection for the Borrower: Lender Oversight
Construction projects can be complex, with many moving parts, from contractors to suppliers. Unfortunately, delays or substandard work are not uncommon. One major advantage of construction loans with progress payments is that lenders will often conduct inspections before releasing funds at each stage. These inspections ensure that the work has been completed satisfactorily and according to schedule, adding an extra layer of oversight to your project.
Example:
Let’s say you’ve reached the framing stage of your new home. Before the next payment is released, the lender will send an inspector to confirm that the work has been completed to a satisfactory standard. If there are any issues, the lender can withhold payment until the problems are resolved. This gives you peace of mind, knowing that you won’t be paying for incomplete or substandard work.
Key Benefits:
Quality assurance: Inspections by the lender help to catch issues early, ensuring that the project stays on track.
Financial protection: Funds are only released when the work meets the lender’s standards, preventing you from overpaying for unfinished or faulty work.
Peace of mind: You have an experienced financial partner looking out for your interests throughout the process.
Manage Cash Flow Effectively: Smooth Out Project Costs
One of the most challenging aspects of any building or renovation project is managing cash flow. Expenses often come in waves, with some stages of construction costing significantly more than others. The good news is that construction loans are designed to help you manage these fluctuating costs.
During the construction period, most lenders offer interest-only payments, which means you’ll only be required to pay interest on the drawn loan amounts, not the full principal. This helps lower your monthly repayments during construction, providing some much-needed breathing room for your finances. Once the project is complete, the loan converts to a traditional principal-and-interest loan, making it easier to transition into a long-term payment structure.
Example:
In the initial months of construction, your loan balance may be relatively small, so your repayments will also be smaller. As the project progresses and you draw more funds, your repayments will gradually increase, allowing you to manage your budget efficiently during each stage of the build.
Key Benefits:
Lower repayments: Interest-only payments during the construction phase reduce financial strain.
Cash flow management: Borrowers can better align loan repayments with the natural ebb and flow of project expenses.
Flexible loan structure: Transitioning to principal-and-interest payments after completion ensures manageable, predictable repayments.
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Is a construction loan right for you?
Talk with one of our business finance experts who can guide you through the process and help find the best solution tailored to your needs.
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