Construction Loans

What are construction loans?

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

In 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 building work are in progress, you will generally only be asked to make interest only repayments on money that has been drawn down.

Interest Only repayments 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, so research is crucial.

Lenders also often set a maximum timeframe for the complete draw down of your loan, usually around 6-12 months. 

If you are not planning to start building right away, you may need to purchase the land on a separate land loan.

 

Building or renovating guide

If you are considering building or renovating, this guide covers everything you need to know from financial considerations to the loan options that are available.

How do construction loans work?

If you're thinking about building or substantially renovating your home, you may need a construction loan.

In this video, Emma explains how construction loans work and what makes them different from other types of home loans.

Watch our video to see if a construction loan is suitable for you.

 

 

Application

Boost your chances of approval by knowing what’s required. Much like a traditional home loan, 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!

 

Contact Stephen Britton and the team at Mortgage Choice on 03 5379 9261 or email stephen.britton@mortgagechoice.com.au