There are few people who are able to afford undertaking large construction projects without financial help. This is where a construction loan can be very useful as it can provide a person with the funds necessary to build a new property or extend an existing property significantly.
Construction Loans are suitable not only for the construction of new homes, but also for major renovations to an existing home. Whilst a home loan necessitates a lump sum payment at agreement signoff, construction loans are usually drawn down in stages. Interest only draws on construction then loan Reverts to a Standard Home Loan on completion. This means that interest is only being calculated on that amount which has been physically drawn down, and you are only making repayments on the portion you have used.
When construction is complete, you can nominate which product or loan type your loan reverts to. A Construction Loan allows you to borrow against the value of the property as if it were completed, as opposed to borrowing only against the value of the land or the current property.
Before you are able to apply for a construction loan you need to be aware that they do not work in the same way that a traditional loan does. You need to make sure that you have everything documented that you will be spending your loan on before you are able to make your application. In fact applications without the supporting documentation can not gain unconditional approval until all the necessary criteria is available
Most construction finance applications are assessed according to the standard process and many of the same documents are required, along with a fully completed documentation which includes:
- Signed fixed-price building contract between borrower and a licensed builder Tender
- Stamped, council-approved building plans
- Copy of builder’s insurance policy
With a construction loan, you can break up the drawdown of the loan amount into five progressive draws, which parallel the construction phases. As one phase of the construction is complete, you are able to draw down the next portion of the loan. If you did not borrow 100% of the cost of construction, the lender will request that you pay all the funds you are required to contribute, before they release any payment to the builder.
- Purchase of the land
- The Slab / pad (floor – also known as ‘bearers and joists’ for wooden floors)
- Roof (usually including frames)
- Lock up
The fact that payment is delivered to the builder in stages means that cash is not paid out until the builder’s work can be inspected and approved by the borrower. The benefit of a construction loan is that a valuer will inspect each stage of your construction on behalf of the lender before they approve each progressive payment.
For your final progress payment request, the lender will usually send a valuer to the property to confirm that work has been completed as per the contract & plans provided. If there is any unfinished work then the lender will withhold payment until the work is completed
What are the options for construction loans with Genuine Savings or without Genuine Savings?
- 5% Genuine savings will allow you to borrow to a maximum of $750,000 to 95% of Construction Costs + cap full mortgage insurance cost for a total of up to 98% LVR.
- No Genuine savings will allow you to borrow to 90% of Construction Costs + cap full mortgage insurance.
What is the maximum number of units I can construct on 1 title?
Before development finance is required you can construct up to a maximum of 4 units as long as subdivision is approved by local council on completion of build.
- Properties must be retained for investment (no Developers)
- Maximum loan is 80% of completed value in acceptable locations
As you can see taking out a construction loan can be much more complex than you might think. With the right advice, from a financial expert however anyone who wants to take up this kind of loan can do so with confidence.
We have mortgage brokers that specialise in Construction Loans. Please complete our Express Enquiry Form or Phone Direct and you can discuss your situation with an expert.
If you wish to proceed, then we will help you to complete all the necessary paperwork and liaise with the lender on your behalf. This will include the completion and submission of your home loan application and the on-going communication between all parties until your home purchase is settled