A construction loan works differently from a standard home loan because funds are generally released in stages as the by
Building a new home is an exciting journey, but it’s also a big commitment. Before you dive in, it’s important to understand the steps involved, what you need to prepare, and the pros and cons of choosing to build rather than buying an established property.
Before signing a building contract, it helps to understand how much you may be bale to borrow and what contribution you mat need to make. Your income, expenses, existing debs, available savings or equity and the overall cost of the project can all influence your construction options.
Before choosing a design or a builder, consider a few important questions:
Your land, building contract, plans and specifications can form an important part of a construction loan application. Lenders may consider the value of the land, total build cost and expected value of the completed property when assessing your application.
Your lender may ask for a fixed-price building contract, approved plans, specifications, council approvals and other supporting documents. Requirements can vary between lenders, so understanding what is needed early can help avoid unnecessary delays.
Once the project details are ready, your construction loan application can be assessed. My Broker & Co can help you compare suitable lenders, understand their requirements and work through application and approval process with you.
Construction loan funds are generally released progressively as agreed stages of the build are completed. These may include stages such as slab, frame, lock-up, fit-out and completion. Your builder normally submits progress payment requests, which the lender reviews before releasing funds.
Once construction is finished, the lender may require a final inspection or valuation before releasing the final payment. Your construction loan then moves into its ongoing repayment phase, subject to the structure and terms of your loan.
Unlike a standard home loan, construction finance is generally released in stages as the build progresses. This means you normally draw only the funds required for each completed stage rather than the full approved amount from the beginning.
Interest is generally charged on the amount of the loan that has been drawn, rather than the full approved construction loan from day one. How repayments work during the build can vary, so it’s important to understand the particular loan structure.
The contribution you need can depend on the land value, construction cost, completed property value, available equity and the lender’s requirements. If you already own property, available equity may potentially form part of your funding strategy.
Rates and fees aren’t the only things to compare. Progress payment processes, redraw or offset availability, loan structure and what happens after construction can all influence which construction loan is suitable for your circumstances.
Building projects can change, and variation, site costs or upgrades may increase the final price. Having a realistic budget and contingency can make it easier to manage unexpected expenses during construction.
Your lender may rely heavily on the information contained in your building contract. Make sure the scope of work, price, payment stages and relevant conditions are clearly documents before applying for finance.
New debts, credit applications or significant changes to your financial position can potentially affect borrowing capacity before or during the finance process. Speak with your broker before making major financial commitments.
It can be useful to speak with a mortgage broker before committing to land or signing a building contract. Understanding your borrowing position and lender requirements early can help you approach the project with greater clarity.
A construction loan generally releases approved funds in stages as your builder completes agreed parts of the project. Rather than receiving the full loan amount upfront, progress payments are usually made throughout construction.
The contribution required depends on factors such as the land value, construction cost, completed property value, available equity and lender requirements. Different lenders may assess the same project differently.
Repayment arrangements vary between lenders and loan structures. During construction, interest is generally calculated on funds that have actually been drawn. Your broker can explain how repayments may work for the options you’re considering.
Potentially. If you already own property, available equity may be able to contribute towards your land or construction costs. How much can be accessed will depend on valuations, existing lending and your ability to service the additional debt.
Lenders may request documents such as your building contract, plans, specifications, council approvals, builder details and evidence of your financial position. Exact requirements vary between lenders.
Construction finance can potentially be used for a knockdown rebuild, but the lender will need to assess the existing property, proposed build, costs and completed value. The loan structure may therefore differ from a straightforward land-and-build project.
Whether you’re buying a land and building, completing a knockdown rebuild or already speaking with a builder, we can help you understand your construction loan options and what lenders may require.
Tell us where you are in the building process and we’ll help you work through your finance options and what lenders may require.
Please note we do not provide tax, legal or accounting advice. Any information contained in this article is of a general nature only and does not take into account the objectives, financial situation or need of any particular person and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. We suggest you consult your own tax, legal and accounting advisers before engaging in or considering the appropriateness of any transaction.