Understanding Construction Loans Australia
If you’re looking to build a new home or making improvements to an existing one, construction loans are available to get you started in the right direction. Apply for residential construction loans with our mortgage brokers today!
What are construction loans? How do construction loans work?
Construction loans are a type of loan used to finance the cost of building a new home or renovating an existing property. A construction loan allows you to draw down money progressively whilst completing different stages of construction. It is also designed to ensure borrowers don’t draw down more than necessary or exceed your budgeted construction costs.
These are loans for home construction only: available for houses built and kept for personal investment or residential purposes and not for constructing dwellings that you intend to sell immediately. Most of these loans can also be used only with licenced builders.
Step-by-step process on how construction loans work
Step 1: Figure out your borrowing capacity
Talk to your mortgage broker for your borrowing capacity. You need to know you can borrow enough for the land and stil lafford to rent and pay bills until the construction is completed.
Step 2: Find your block of land
Consider the following:
- type/size of the house you want to build
- suitability of the block
- financial capacity to build on the block
- cost for earthworks if building on a slope
- land grants available
- settlement of your land
Step 3: Research build ideas
Check out display homes and talk to builders to get an idea on what you like and the costs associated with the construction.
Step 4: Buy the land.
Make an offer and get the land under contract. Discuss the following:
- required funds for construction
- any items not included in the construction contract (e.g., driveways, curtains, landscaping)
- a cash buffer in case you go over budget
- pre-approval for the estimated construction loan
- registration of property
Step 5: Start your building plans
As soon as you have a contract on the land, you should be organising the construction. Finalise a set of plans. Are you working with a project builder? Do they have designs for you to choose from? Get quotes from builders in the form of a tender with all the specifications, inclusions, and allowances for the build.
Note: Talk to your construction loan broker if you are applying for construction loans on existing homes. The process can be a little different.
Below are your construction loan financing options:
- Option 1: Buy the land and select your own builder and house design.
- Option 2: Opt for a House & Land package where you purchase the block of land and house together.
Speak to your construction financing broker to discuss your construction requirements.
The benefits of taking out home construction loans
Whether or not you need construction loans for renovations or building a new home, they usually have the same loan terms with a standard home loan. But as a special type of home loan, it offers many advantages not accessible with conventional mortgages.
Draw down your loan in each stage of the construction, and only once the inclusions and quality of finish have been approved by you.
To help with cash flow, Interest Only payments are available during construction. You can make loan terms around the needs of your project.
Pay interest only on funds drawn down, and not the whole amount upfront. This means lower repayments for you.
Make additional payments into your constructionl loan at any time to reduce your loan balance. This means you may pay less interest.
A construction loan has a cheaper stamp duty as it is usually only paid on the land, not the home being built. Many state governments also offer extra concessions and grants if you’re building than buying an existing home.
A construction loan can shield you against sloppy construction or incomplete work. The progress payments are only released to the builder after the completion of each stage of the build — to the required standard.
FAQs on Construction Loan Financing
Your construction loan is ready to settle, what happens next?
- Once the loan settles the file will be sent to the progress payment team.
- The progress payment team will ensure they have all the documents required to make the progress payments (e.g., Council approved all plans, insurances, FHOG approval, builder receipts for deposit).
- The progress payment team will also calculate any extra funds you will need to pay the builder before the bank will start making payments. All of your contributions towards the construction ned to be paid first.
- Once this process is complete, the bank will issue a commencement letter to the builder so the builder can go to the site.
- Once the slab is poured, the builder will send you an invoice for the first construction payment (please note you would have already paid the 5% deposit prior to this), all applicants of the loan will need to sign the invoice and forward to us. Some lenders also have progress payment forms that need to be signed and sent in with the builders invoice.
- When all other invoices for progress payment claims get sent to you, please sign and forward to us to arrange paymen by the lender ASAP. Please note most builders have strict 7-day terms for these payments to occur. If the payments take longer than this, you could incur penalty interest as per your building contract (check term details).
- Before the bank will make the first and last progress payments, they will require a valuation. You should expect this payment to take at least 5 working days depending on the valuers access to the site and the banks progress payment queue.
- All other progress payments should occur within 72 hours of the bank receiving the signed progress claim.
For more information, visit this page on Construction Finance post-settlement process.
Why go with the construction loan brokers at ZEP Finance
We will research the market, compare rates from various banks and lenders, and negotiate for the best loan that suit your needs on your behalf
We do everything for you! We believe borrowers should be able to enjoy a simple application process simple. Relax as we manage the paperwork for you from application right through to settlement.
You have us at your disposal for any of your questions about the loan process. Your current financial situation will be assessed, and we’ll provide expert advice on how best to achieve that building goal.
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