How does a Construction Loan work?
With an ever increasing number of people moving in to the Hunter Valley region it’s little surprise that you can’t seem to drive 10 minutes without seeing a new housing estate under construction. Whether for work, or simply a tree change, the region is building new houses at an astonishing rate.
Securing finance when constructing a new home, or making major structural renovations, can be confronting for many. However in reality it’s a fairly straightforward process. The key is to understand that process before you start.
When applying for a construction loan you are able to borrow against the value of the property as if has been completed. This way, you won’t have to return to your lender to ask for more funds during construction. This is particularly reassuring for those who want the land & construction loan together. Once you have settled on the land, your lender will expect you to commence construction within a defined time period, often 6-12 months.
In addition to the typical requirements for loan approval (income, liability, asset status), to be approved for a Construction Loan you’ll need the following as an absolute minimum:
- Signed & dated building contract with a licensed builder
- Council approved plans for the construction
- Copy of the builders Insurance policy
- Quotes for any additional works not covered by the building contract
How does the Builder get paid?
You are not expected to pay the total of construction costs to the builder in one lump sum; instead you will have a Progress Payment schedule issued by your builder, which is usually 5 or 6 progressive payments throughout the construction journey:
- Foundation– when the slab is laid
- Frame– when the building frame is complete
- Lock Up– upon completion of walls & roofing
- Fit Out– internal fittings completed
- Completion – when all items in building contract completed
Your lender will typically check the property at each stage to ensure the build is happening as per contract. Often referred to as Inspection fees, each inspection could attract a fee. Some lenders may also charge a fee to make each progress payment, referred to as drawdown fees.
The majority of lenders will allow you to make repayments on your loan throughout the construction phase as interest only. Full principal & interest repayments will commence once the build has completed and your full loan balance has been drawn down.
So, if your loan is for $250,000 and the first invoice is for $45,000, the interest only repayments will be calculated on your account balance of $45,000.
If this is the first home you have owned you could also be eligible for the First Home Owners Grant.
If you are looking at building a new home or undertaking major renovations, give Mike a call on 0435 945 419. As your Hunter Valley Mortgage Broker, I’ll assist with more detail on which construction product can best suit your needs.