Building on Up: Your Guide to Construction Loans
After months of house hunting, of searching high and low, and going through countless suburbs, you’ve finally found your dream home… or the floor plans, at least.
But what do you do now? The standard loan you’ve researched isn’t suitable for the construction of your dream home, and you’re unsure about what financial direction to go in.
Don’t stress, at Select, we are here to help. If you have purchased land and are looking to build, a construction loan is something to keep in mind. Construction loans are specially tailored to parallel the building process. Unlike traditional loans, the amount is not released in one large lump sum. Instead, you can draw on the amount you need at each critical stage of the building process.
Is applying for a construction loan the same as applying for a traditional loan?
As this type of loan means lenders are funding an asset that has yet to be built, you will need to supply a few extra documents than just pay slips, tax returns, and the like, when applying for one.
You will need to provide:
- a signed HIA/MBA fixed price building contract detailing the project specifications, potential variations, allowances, and other costs involved,
- full building plans, and
- quotes for any additional work that the building contract doesn’t cover.
Some lenders are now lending up to 95% of the land value, but it is a good idea to talk to your broker to assess what is available to you.
How do progress payments work?
Construction loans are dispensed in progress payments available at each stage of the building process. Typically, there are five stages where you can draw on the payments;
1. The preparation and purchase of the land
2. The base or ‘floor pad’
3. The frame and roof
4. Lock-up
5. Fit-out and final touches
Before the bank pays the builder to proceed to the next project phase, a valuer will inspect the progress to make sure each stage is completed according to the building contract. Once they are satisfied, they will notify the lender to authorise the next instalment.
The great thing about progress payments is you will only need to make interest-only repayments on the amount released while your house is under construction. This means you won’t be paying interest on money you haven’t used, and your repayments will only increase as the project nears completion.
Are there hidden costs involved?
Before settling on the loan, you will need to consider the full costs involved. These costs come in the form of inspection fees and drawdown fees. Usually, the lender will charge a fee to inspect the project before each instalment is paid. The amount may vary depending on your bank and the location of your property. They may also charge a fee to cover the costs of making progress payments available to you, either in one sum before the project begins or every time you withdraw.
Will my insurance cover me if anything goes wrong?
Insurance companies will not cover your home until after the building is complete. It is important to make sure that you choose a reputable and licenced builder who has their own insurance to protect you against non-completion of the house, any structural defects or public liability claims.
What now?
Once your dream home is constructed, you may have to go through a few more formalities before moving in. Firstly, the lender may want to inspect the property one last time and complete a final valuation before the final payment is made to the builder. They will also need a copy of an Occupancy Permit, the builder’s final invoice, and confirmation of a home building insurance policy.
At Select, we do all the heavy lifting for you. We offer no-obligation, quality, and free advice so you can reach your financial goals. If you are looking for a loan suited to your needs, our brokers will sift through Australia’s leading lenders and handpick a product tailored to your circumstances.