CONSTRUCTION HOME LOAN

Are you planning on building your own home or investment property? If so, a construction home loan is what you will require.

A construction home loan provides payments in stages based on a fixed price building contract which in most cases is required to be completed prior to lenders providing approval and funding.

Generally, repayments will be interest-only during the construction period which will switch to principal and interest once the home is complete and a certificate of occupancy has been provided.

Progress Draw Schedule

A construction loan normally consists of 5 stages and the progress payments are broken down into percentages as follows;

Stage 1 - Concrete Slab

This is the first stage of any home being built and when the concrete foundation is laid

Stage 2 - Frame

This stage consistents of the frame of the property being erected

Stage 3 - Lockup

The walls, windows and doors are completed and the property can be locked up with access require by lock and key

Stage 4 - Fixtures and Fittings

This is the completion of all internal fixtures and fittings such as carpet, painted walls and appliances are installed

Stage 5 - Completion

This is when the finishing touches are completed, hot water services are installed and the property handover takes place for the new owners.

Once each of the above stages is complete, an invoice will be provided by the builder which needs to be passed onto the lender to be paid. Once the invoice has been paid, this portion of the loan will be drawn down and interest and repayments will begin accruing. Your mortgage broker will be able to complete the submissions to your lender on your behalf.

Applying for a Construction Loan

As mentioned before, you will need to lock in a fixed-price building contract with an approved builder before you can apply for this type of loan. You can generally borrow up to 90% of the construction cost for investment and as high as 95% for owner-occupied purposes.

There are a few additional documents that you’ll need to prepare on top of your standard home loan documents. These include:

• Signed building contract
• Council approved building plans
• Copy of the builder’s license and insurance policy
• Quotes for additional works, such as landscaping

Pros

• Lower repayments as you are paying interest only on the amount drawn and not the full loan. Many construction loans only require interest-only payments during the construction period.
• The lender will conduct quality control checks at each stage of construction, protecting you from shoddy workmanship.
• Stamp duty savings, as you only pay stamp duty on the land you purchase and not the property itself.
• Borrowing on the value of the property when completed, rather than its current market value.
• Ability to withdraw funds while building and make extra payments.

Cons

• Higher valuation fees, as the lender needs to re-value the property after each stage of construction.
• Need to have a building contract in place, which is not so flexible for change.
• Given it is a variable loan; loan repayments will increase if interest rates go up.

What happens when the construction is complete?

In most cases, the construction loan will revert to a standard home loan once the property has been completed. You will then have the choice of paying down your principal and interest or interest only if you are eligible.