If you want to update your existing property or you want a house customised to your needs and preferences, building a house instead of buying one can be a good choice.
If you’re looking to do this, then a construction loan is the finance tool you need.
What is a construction loan?
A construction loan is a type of loan that is used to pay for the cost of building a new house or a major renovation. It has a different payment scheme than a traditional home loan because it has progressive payments or draw-downs where the lender releases funds throughout the stages of construction.
The construction generally consists of six stages:
Slab down: laying of the foundation
Frame up: building of roofing and brickwork
Lock up: installation of windows and doors
Fixing: putting in place the internal fittings and fixtures
Practical Completion: adding of finishing touches and final cleaning of the property + Handing over the Keys
After each stage, your lender can arrange an inspection and then release the funds to the builder for the work - How many inspections actually take place depends on the lender. Note that inspection are there to protect the lender in ensuring the builder has completed the works that is being claimed - this protects you too.
During the contruction period, the loan repayments are usually 'Interest Only' and calculated based only on the funds drawn down. This calculation is done by the lender everyday on the actual loan balance - this means that the more your house gets built - and paid for - the higher your repyamtns will become.
After construction, your loan will convert to a 'Standard loan' which usually has principal and interest repayments on the entire balance.
What to consider when choosing a construction loan?
Construction loans work a bit differently from the regular mortgage. Here are the top things you need to consider when choosing a construction loan:
Interest rate: Shop around for a competitive interest rate that will suit your financial situation. Securing the best construction loan rate can give you lower monthly repayments.
Interest-only option: This feature will let you make interest-only repayments during the period of construction.
Valuation of land and building: Your lender will order a valuation on the land and completed building to determine your loan-to-value ratio or LVR. They will also value every building stage for invoicing before releasing the funds to the builder.
Deposit: The minimum amount of deposit you will need is 5% hiwever some lenders may require more like 10 per cent of the final property value. And if you put down more than 20 per cent, you won’t need to pay for Lender’s Mortgage Insurance.
Construction loan fees: Monthly fees, settlement fees, and valuation fees can add up. Make sure to take these into account when choosing a construction loan.
Financial documents: Just like applying for a regular mortgage, you will need to provide financial documents such as payslips, bank statements or tax returns. The required documents will depend on your lender.
Signed building contract: Documents you will need when applying for a construction loan are Contract of Sale for the land and the building contract that will include all the plans and specifications.
Builders and tradies: Your lender will approve the builder you select, so it’s important to choose one that is competent, with the right credentials.
Choosing a construction loan that is suitable for your situation and budget will make it possible to build your dream house. It may require some time to complete but the wait will be worth it in the end.
At Go Mortgage we will of course help you find the right loan & wrangle our way through the paperwork & red tape to get your approval over the line.
We also will help you work your way through the contruction process from a paperwork & risk perspective. We have handled over 1,000 construction loans and have a purpose built process & customer service team that are ready to make your building experience a breeze.