Construction loans - what are they and how they work

What are construction loans?

Construction loans are different from regular home loans, due to building works requiring ongoing payments as the construction progresses.

In the case of a traditional home loan, the totality of funds will be made available in a single lump sum, while a construction loan lets borrowers draw on the loan balance when payments need to be made to the builder.

These payments are made at key stages of the building process, and are known as progress payments.

While work is still in progress, you will only be asked to make interest repayments on money that has been drawn down. This means you will only be paying interest on money that has been used.

Therefore, repayments will be smaller at the start of your loan, and will increase gradually as your construction project approaches completion.

In general, construction home loans have a variable rate, with a maximum Loan to Value Ratio (LVR) of 95%. This varies depending on lenders, therefore it is something worth speaking to us about.

Lenders also often set a maximum timeframe for the complete draw down of your loan, usually around 6 months. If you are not planning to start building right away, you may need to purchase the land on a separate land loan.

The construction home loan process

Application

Much like a traditional home loans, your lender will have a look at your income and savings, to judge your capacity of repayment.

However, additional documents will be needed for a construction loan, such as a fixed price building contract, building plans approved by Council, a copy of your builder’s licence, etc.

Making progress payments

Once your loan is approved, funds will be provided in a series of payments. These will be made at various milestones of the building process, outlined in your building contract.

The six stages of construction are typically the preparation, followed by the slab (or base floor), frame, lock up, fit out and finally, completion.

Home is complete

Before making the last progress payment to your builder, your lender will inspect the property and need a few last documents for a final valuation.

Once the final payment is made, your loan will switch to the standard home loan or loan package that you have agreed upon.

You are now free to move in!

Celebrate with friends and family, and make a fresh start in your brand-new home!

If you're thinking of building your next property, book a call with us today here: https://bit.ly/MCBuderimappt