If you are planning to purchase a land and build your dream home, or knocking down an existing home and rebuilding or you have major renovation on the plan, you are likely to need a Construction loan. So what is a construction loan? A construction loan is a type of loan that gives you access to the money in your loan in a progress, which are paid to your builder as they finish each stage of the build. By releasing the funds in stages, rather than in one lump sum upfront, you’ll only pay interest on the money as you use it.

The most common construction loan we come across is house and land where buyers are purchasing a land and building their home. Some scenarios are where buyers purchase a land and then start shopping around for builders OR some scenarios where they are buying land and building all in one package. 

To be eligible for construction loan, borrowers will need to meet certain requirements such as the type of the building contract, deposit you have and affordability.

How does it work

The process of construction loan is little different to regular home loan. If you are buying a land and building a home there will be two contracts, one for the purchase of the land and another for the building. For building contract most lenders will need you to provide Fixed price building contract that has breakdown of stages of the construction and the cost.

Most fixed price contract have 5 stages

• Base stage – Laying the slab.

• Frame stage – Framing and roof trusses

• The lock up – Brickwork, wall cladding, windows etc

• The fixing and fit off – internal plaster, cupboards, shelves

• Practical completion – Painting, lighting, features, appliances etc

On completion of each above stages, builders send the invoice for payment and once lender is satisfied they will pay the builder. Borrowers will only pay interest on the drawdown amount which will help with the cashflow.

Borrowers contribution

Most lenders requires you to pay your contribution to builders prior to them paying the invoices. For Example, if your building contract is for $500,000 and your loan is approved for $450,000 then you must pay $50,000 first before the lender starts to pay invoices.

 

Repayment on Construction loan

Most construction loans requires Interest only repayment during construction that will help with the cashflow. Lenders allow 12-24 months of Interest only repayment which is mostly sufficient to complete the property. Once construction completes then loan will revert to standard loan and depending on your agreement repayment could be Principal and Interest OR it will continue on Interest only payments.

 

Risks of Construction

• Cost Overruns: Unexpected costs can strain your budget
• Construction Delays: Delays can impact your budget and timeline
• Builder Issues: Choosing an unreliable builder can lead to problems

Few tips for construction process

1. • Borrowing – Speak to us to work out your affordability depending upon your income and savings

1. • Choosing builder – Shop around for builders, this can be very challenging as there are many builders around. Research and gather recommendations. Look for builders who have experience in similar projects. Also find out how their post construction service as once you move into the property you will likely have issues and it is extremely important to have builders who can assist promptly with warranty services.

1. • Quotes – obtain detailed multiple quotes from few builders and compare before committing

1. • Cost Overruns – Cost overruns are when the building expenses exceed the approval amount OR when there are other costs that may come up during construction. This may be due to changing your kitchen benchtops, or having more downlights, or increasing the height of the house. If you are unable to increase the loan amount then you will need to come up with extra costs to cover those variations

1. • Post construction – When you build house there will be quite a few other tasks you will need to complete before you can live there such as landscaping, driveway, windows coverings, flyscreens etc. This means that before you start to build you must budget for all post construction tasks so it does not come as a surprise at the end. 

Building a house is a long process, it is a significant undertaking that can take months, even years depending upon various factors. While it is a long and challenging process, the end result – a home that perfectly reflects your vision – make it all worthwhile.

Please contact us, if you are planning to build and you need construction loans. We will guide you throughout the process from purchase of a land to the construction so that the process becomes easy to understand. We understand the process can be overwhelming however we will guide you to make the whole process as simple as possible. 

Please contact us to discuss more. 

Draw Equity Home Loans