All About Construction Loans

If you looking at building a home from scratch or doing a substantial renovation it is likely that you’ll need a construction loan. Many lenders offer construction loans as a part of their suite of products and the reality is that they are similar to a normal home loan with a few subtle differences.

Progress Payments

Unlike normal loans the bank likes to control funds during construction to help mitigate risk of a builder not completing works. The way this is managed is through progress payments. Typically you will have 5 stages of your build being:

  • Slab or foundation works
  • Walls and Roof
  • Lock up
  • Fixings
  • Practical Completion

Through each stage builder will request payments and the bank will release funds in line with the contract. Through each progress payment your loan balance owing will increase until fully drawn.

Interest Only During Construction

During the build process the repayments on your mortgage will be interest only up until the loan is fully drawn down and your home is completed. The interest only repayments help make the build process more affordable with most people still having to fund their current households.

Multiple Valuations

Unlike the purchase of an established home it is normal to expect multiple valuations on the property. The first being pre build known as an “as if” valuation, which is basically an estimate of the post build value with subsequent valuations ensuring the build is on track and within budget.

What do you need?

As well as the income and debt verification requirements that are required for a normal home loan there are some additional requirements when construction is involved.

  1. Council approved building plans
  2. Signed building contract with an approved builder
  3. Copy of builder’s license and insurance policy
  4. Quotes for additional works you may need to pay for such as landscaping

Our recommendation

Before looking into building it is important to get your finance in order. One of our brokers can help make sure your expectations meet your budget and you don’t waste unnecessary time shopping for things you can’t afford.

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