What Is A Construction Home Loan – Everything You Need To Know

What Is A Construction Home Loan
Finance

Building a home or undertaking a major structural renovation project can be quite a challenge even if you have the best-laid plan. Lucky for us, Australians, we are spoiled with choices when it comes to construction loans.

Although we have plenty of choices it’s still important to know what they are and what to look for. This article covers the general information about construction loans you need to know before you get a construction loan.

What is a construction home loan?

A construction home loan is a type of home loan for people who are looking to build a home rather than buying an established property. It does not work the same way as a regular home loan, which can only be used in purchasing an existing property.

Usually, a construction loan has a progressive drawn-down. This means you draw down the loan (or increase your borrowing) as needed to pay for the construction’s progress payments. The amount you can borrow will be partly based on the value of the property once it’s built.

How do progress payments work?

Once your construction loan gets approved and the construction of the property is in progress, lenders will make progress payments throughout the stages of construction.

Typically, the payments will be made at upon completion of five stages:

  • Slab down or base

The first loan amount will help you with the cost of building the foundation of your property. This stage includes levelling of the ground, plumbing and waterproofing the foundation. It will consist of 10% of your contract and last up to two weeks.

  • Frame

For the second stage, this amount will cover the expenses incurred building the frame of your property. This includes partial brickwork, the roofing, trusses and windows. It takes up 15% of your total contract.

  • Lock-up

This stage takes up the most significant proportion of your contract, 35%. This will cover the cost of putting up the external walls, and put in windows and doors (hence the term ‘lock-up)’

  • Fixing or fit-out

In this stage, your loan amount will cover the cost of your property’s internal fittings and fixtures of your property. This includes plaster, part-installation of cupboards and benches, plumbing, electricity, and gutters. Fixing or fit-out stage typically takes up to six weeks of work. This makes up 20% of your total building contract.

  • Completion

The final stage, completion amount will cover the conclusion of contracted items, builders, and equipment, as well as the finishing touches which include plumbing, electricity, and overall cleaning.

The interest and repayments are calculated based only on the funds used so far as your construction loan is progressively being drawn down.

It is important to keep in mind that most banks require you to use all your equity before they release the next payment.

What are the benefits of a construction loan?

  • They’re interest-only during the construction

Since lenders won’t give you the full amount until the construction is complete, they don’t ask you to start paying down the principal until then either. You’ll be expected to pay lower, interest-only payments on the loan on the duration of the construction. It will give you more time to save.

  • They have flexible terms

Compared to traditional loans, construction loan terms offer much more flexibility. In fact, you can work your loan terms around the needs of your project.

  • The added scrutiny provides structure

At first glance, added scrutiny may not seem like a good thing but it is. It can help your projects stay on budget and schedule.

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