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When do you need a construction loan?
Whether you're breathing new life into an old property, building your dream home from scratch, or diving into property investment, we’re here to assist you. Construction loans (also known as building loans), enable you to undertake a new construction through a registered builder and are specifically designed with the flexibility required to meet the challenges of your new project.
How does the builder get paid?
With a construction loan you won’t receive all the funds upfront. Typically, a construction project is undertaken in six key stages: deposit, slab, frame, lockup, internal fitout and the completion stage.
The progressive drawdown feature of the loan means at the completion of each stage the Builder provides you with an invoice which you then pass onto the lender for payment. The lender then draws on the remaining balance of your loan until all the stages are complete.
If you have an interest only construction loan you will pay interest each month on the balance of the loan however it's important to remember that as you draw more from your loan, your interest payments will increase, so budgeting is essential.
What you need to qualify for a construction loan?
Qualifying for a construction loan is subject to normal lending criteria however you will need to provide a signed copy of your fixed price build contract, specification schedule and stamped plans. The lender will then undertake an "as if complete" valuation which confirms the market estimate of the land and build as a completed project. Subject to approval and settlement conditions the lender will release funds for the purchase of the land (if you don't already own it) and hold back the funds equivalent to the fixed price build contract amount.
Insurance
The builder will need to make available specific insurance policies before the construction begins. These policies include:
- Builder’s Risk Insurance: Covers risk to the building during construction.
- Public Liability Insurance: Covers risks such as damage to property and injury to individuals.
- Home Warranty insurance: It covers risks such as non-completion by the builder due to death, insolvency or disappearance. Also covers structural defects due to builder negligence.
Our tips to avoid the tears!
Contract variations (cost overruns)
Cost overruns occur when variations are made to the build contract that increases the contract amount to more than was originally approved with the lender. Sometimes this happens, you change your mind and go with the gold taps, extra power points or better tiles. It's important to remember that the lender may not be able to provide additional funding so you will need to cover the additional cost yourself.
Building delays
Building a new home takes the patience of an angel as it's very common to experience building delays that are outside of the builder's control. Common delays include material and labour shortages, inclement weather, breakages and other damage. If a delay does occur it's best to liaise with your site manager and always have a contingency living arrangement in place if you are planning on moving into the property by a certain date.
Completion stage
There is nothing more frustrating than knowing your new home is ready to move into but your lender says "we aren't ready to make final payment yet". It's important to remember that the final payment can often take 10-15 business days to complete. This is due to the lender having to engage an external inspection of the property and finalise the construction process before the final payment can be made. Once construction has finished on your home don't book the removalist for the next day, take a deep breath and allow the lender to complete the necessary steps to finalise your construction loan.
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Frequently asked questions
How much can I borrow?
We’re all unique when it comes to our finances and borrowing needs. Get an estimate on how much you may be able to borrow (subject to satisfying legal and lender requirements) with our borrowing capacity calculator. Or contact us today, we can help with calculations based on your circumstances.
How do I choose the right construction loan?
Our team will help guide you to the construction options that best meet your needs. There are hundreds of different home loans available, so talk to us today.
How much do I need for a deposit?
Usually between 5% – 10% of the value of a property, which you pay when signing a Contract of Sale and/or Build Contract. Speak with us to discuss your options for a deposit.
How much will regular repayments be?
There are many different types of loan products with varying interest rates which will impact your repayment amount. Typically, a construction loan is on interest only repayments during the construction phase. Talk to us today about the products currently available that suit your lending needs, and we’ll calculate the repayments for you.
How often do I make home loan repayments — weekly, fortnightly or monthly?
Most lenders offer flexible repayment options to suit your pay cycle. Aim for weekly or fortnightly repayments, instead of monthly, as you will make more payments in a year, which will shave dollars and time off your loan. Some lenders will only allow monthly repayments during the interest only construction phase.
What is the First Home Owner Grant and can I get one?
This is a grant available to Australian citizens or permanent residents who wish to buy or build their first home, which will be their principal place of residence within 12 months of settlement. Contact us directly to find out more about eligibility requirements in your state and how much grant money you could receive.
What fees/costs should I budget for?
There are a number of fees and costs involved when buying a property. To help avoid any surprises, the list below sets out many of the usual costs:
- Stamp duty — This is the big one. All other costs are relatively small by comparison. Stamp duty rates vary between state and territory governments and also depend on the value of the property you buy. You may also have to pay stamp duty on the mortgage itself.
- Legal/conveyancing fees — Generally around $1,250 – $2000, these fees cover all the legal requirements around your property purchase, including title searches.
- Construction overruns - if you make variations to your build contract that increases the amount owed to the builder you will generally need to cover these costs yourself.
- Lender costs — Most lenders charge establishment fees to help cover the costs of their own valuation as well as administration fees. We will let you know what your lender charges but allow about $200 to $995.
- Moving costs — Don’t forget to factor in the cost of a removalist if you plan on using one.
- Mortgage Insurance costs — If you borrow more than 80% of the purchase price of the property, you’ll also need to pay Lender Mortgage Insurance. You may also consider whether to take out Mortgage Protection Insurance.
- Rent - If you are temporarily renting whilst building your new home you will need to budget for rent payments as well as the ongoing home loan repayments prior to moving in.
- Ongoing costs — You will need to include council and water rates along with regular loan repayments. It is important to also consider building insurance and contents insurance. Your lender will probably require a minimum sum insured for the building to cover the loan.
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