Looking to build or substantially renovate an existing property? Then a Construction Loan is what you are looking for.
A construction loan is designed for those looking to buy land and construct either their own home or an investment. It is also used for those with an existing dwelling who are going to do a major overhaul which involves structural changes.
The difference with a construction loan compared with a regular home is that construction loans have progressive draw downs. This means that as your construction reaches each pre-set milestone you will “draw down” on your loan until the project is complete and your loan becomes fully drawn.
For construction loans, the amount you can borrow is based on the “as complete” value of the property taking into account the value of the land and the new structure.
Although you are of course more than welcome to pay anything over the minimum, most construction loans are Interest Only until completion when they will revert to principal and interest if that is your chosen product. This is particularly helpful when you are paying rent or another home loan while you build.
What do I need to get a construction loan?
Gaining approval for a construction loan is a little different to applying for a standard home loan on an established property.
Although everything is the same in regards to your assets, liabilities, incomes and expenses. The way the bank values the property is different. With an established home they can just send out a valuer and away you go. With a construction loan they need to firstly value the land and then they need to value your proposed construction.
To enable this, you will need to have a contract on a block of land and contract from a builder. This contract will need to include all the specifications, inclusions and plans of the new dwelling.
Armed with the land and build contract, the valuer can then provide a detailed report on what they would anticipate the dwelling to be worth on completion. This is the figure that the bank will lend against.
How do progress payments work?
Once your construction loan is approved you will then need to provide council approved plans (no point paying for these if the loan is not going to be approved!!). Once received the bank will provide a commencement letter for your builder.
Once this letter is received the builder will begin your construction. As each milestone is reached, you will be provided with an invoice. If you’re happy with the works completed you will fill in the paperwork required by your chosen lender and the lender will then pay your builder directly.
Most builds follow the same five stages:
(1) Slab down or base: This is an amount to help you lay the foundation of your property. It covers the levelling of the ground, as well as the plumbing and waterproofing of your foundation.
(2) Frame stage: This is an amount to help you build the frame of your property. It covers partial brickwork, the roofing, trusses, and windows.
(3) Lockup: This is an amount to help you put up the external walls, and put in windows and doors (hence the term ‘lockup’, to make sure your house is lockable).
(4) Fitout or fixing: This is an amount to help you do the internal fittings and fixtures of your property. It covers plasterboards, the part-installation of cupboards and benches, plumbing, electricity, and gutters.
(5) Completion: This is an amount for the conclusion of contracted items (e.g. builders, equipment), as well as any finishing touches such as plumbing, electricity, and overall cleaning.
As you progressively draw down on your loan your repayments will slowly increase. For example, you may already own the land so you have no debt.
Once the construction begins and the slab stage is reached the bank may pay your builder $50,000. You will now be paying interest on $50,00. Your next draw may be $100,00 making your loan repayments based on $150,000.
So essentially your loan repayment will slowly increase as you draw down on the loan until completion when your loan is now fully drawn and you’re paying interest on the full loan amount approved.
If you would like to learn more Click Here for your Complimentary Home Loan Assessment.