Construction Loans

A construction loan is a specific type of home loan designed to assist the funding of a new home’s construction. When it comes to the standard home loan, they usually only apply to existing properties. Getting a loan for a home that doesn’t exist yet is a bit trickier, so a construction loan works in conjunction with the building process and helps you pay for it.

If you are capable of building your new home without engaging a licensed builder, you might be able to apply for an owner builder construction loan. Not all lenders offer these, and the ones that do tend to be quite conservative in their dealings. For example, unless you have a building licence, your lender might only offer 60% of the end market value of your home, meaning you’ll need a deposit of 40%. Some lenders will also tack on an additional amount to your construction quote in case of any cost overruns. At the end of the day, if you have no experience in the construction industry, it’s probably best to hire a professional and opt for a regular construction loan.

Are construction loan rates higher?

Although not always the case, building loans tend to have higher interest rates than standard home loans on average. These interest rates might be higher than a standard home loan since it’s harder for a lender to value a home that doesn’t yet exist, which adds an element of risk. To compensate for this risk, lenders tend to up the interest rate. In addition to the higher interest rate, building loans can also have higher fees too. A common one is a valuation fee, which can be more costly with a building loan since the lender has to do a valuation of your property after each stage of the construction process (more on this below). There can also be higher administration fees and upfront fees.

How does a construction loan work?

Construction loans, also known as building loans, function very differently to a standard home loan. For one, they typically charge interest-only repayments for the duration of the build, which is initially set at 12 months in most cases. This is to keep your repayments to a minimum during construction, before reverting to a principal and interest loan at the end, known as the ‘end loan’. An even bigger difference between construction loans and home loans is how your repayments are calculated. A standard home loan charges you interest on the full loan amount, but a home construction loan divides your loan into stages based on what part of the building process is occurring, a method known as progressive draw-down or progress payments

Features & Benifits.

Flexibility

Construction Loans have Interest Only payments during the construction period, meaning your repayments are lower throughout this time.

Convenience

You can make additional payments into your Construction Loan at any time. This reduces your loan balance and means you may pay less interest.

Build in stages

Building a property or undertaking major renovations is a big project, so it’s important you know what to expect at each stage. Construction Loans give you the flexibility to draw down the loan at various stages of the build (also known as Progress Payments). Your Progress Payment Schedule will typically have 5-6 stages during the construction period.

Availability

A Construction Loan is only available for houses built and kept for personal investment or residential purposes and not for building dwellings that you plan to sell immediately. Speak to your Home Loan Specialist to discuss your construction requirements. .

Fees & Progress Payments

our build is funded through a series of Progress Payments and paid to your builder after each stage of construction is completed. Your builder will provide you with an invoice, and once you’re satisfied that the work has been completed, sign the invoice and forward it to your Home Lending Specialist or Broker who will then arrange for your builder to be paid.

Timing

Construction must commence within a set time from the Disclosure Date on your loan contract and be completed within 24 months of the Disclosure Date. Once you provide us with the invoice for the final Progress Payment to be paid to your builder, we’ll conduct a final inspection to ensure that the property has been built to the building contract specifications.

How does a construction loan work?

How often are progress payments made?

The construction process is typically divided into five stages. Upon completion of each, you’ll have to submit all the relevant claims, invoices and receipts to your lender. The five stages are:

1. Slab:

This is the first stage of the construction process. Here, the concrete slab which will make up the foundation of your home is measured and poured. Once the slab has had time to cure, builders will also connect the plumbing and drains.

2. Frame:

With the slab laid, the builder will now focus on erecting the skeleton of your home. This will take approximately one day for an average, single storey property and between two to five days for a two storey property.

3. Lock-up:

The lock-up stage is when the exterior of your home begins to take shape. As you might have guessed from the name, it involves putting up the external walls, doors, roofing, windows and other components that will allow you to ‘lock up’ your property.

4. Fit out:

Now that your house is properly secured, the builder will be able to install the internal fittings and fixtures, such as lights and plumbing. They will also begin work on things like benchtops and cupboards.

5. Completion:

In the final fix, loose ends on things like plumbing and electricity will be tied up and painting and detailing will be completed. Site clean-up also takes place during this stage, leaving the building and its surroundings looking presentable.

How can I apply for a construction loan?

Before you can apply for a construction loan, the plans for your new property will need to be approved by your local council (or an authorised agent acting on your council’s behalf). This is usually handled by your builder or architect. The council permit must then be submitted to your bank, along with a few other documents (detailed below). These include the:

Bulider’s contract

building plans

the schedule of finishes and specifications

and all relevant insurance policies Just as with a traditional mortgage, your bank will go through your finances to make sure you can comfortably service a loan. That means your credit score, income, expenses and any other debts you might have. A property appraiser will then estimate the value of the property - including land - as if the build was complete. This will help your bank determine how much to lend you. Further valuations will likely take place as your home is being built. Don’t forget to include any quotes for any out of contract items you plan to purchase, such as fencing, bathroom tiles and landscaping, otherwise the appraiser will not include them in the valuation. If your application is successful, you will get a loan offer and hand over any other documents that might be required as part of your loan agreement.

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