Everyone has a different dream home in their head. What it looks like, what it’s made of, how large it is, how many storeys, how many windows, how many rooms, the layout, and so on. Usually, when you’re buying your own home, you try to find something as close to that dream home as possible. But what if you don’t want close? What if you want exact? Well then, the best option could be to build it from the ground up. And if you’re willing to go for it, then a construction loan could be what you are looking for.
A construction loan is a type of home loan for people who plan to build their homes instead of purchasing an established property. There are two significant differences between a construction loan and a standard home loan:
As mentioned above, you don’t get the money from a construction loan all in one go. Instead, the lender releases the money in instalments as the construction of your home progresses. These are called ‘progress payments’ or ‘progressive drawdowns’.
Before construction begins, the amount available for lending is decided based on the estimated value of the building once it is completed. This value is usually agreed upon by a registered valuer and the lender. They work out how much the building will cost to construct and then split the overall cost into stages. This helps in working out the payment schedule.
As construction moves forward, the builder provides an invoice that must be signed and forwarded to your lender. Before releasing the funds, your lender may send someone to check and verify the progress. After the invoice is processed, the bank will deliver the funds and pay the builder for the completed work.
During the construction timeline, you will usually pay interest only, with interest calculated on the amount drawn down at the time. For example, if you require a total loan of $500,000 to complete the build and have currently drawn down $200,000, you will only be charged interest on the $200,000.
Once your home is complete and the last progress payment is made, you will usually switch over to making repayments (principal and interest) for the full amount that has been drawn down. Your home loan term also begins from this point on.
To find out more about financing a home build call your expert Nectar mortgage broker and ask them all the questions you want. They’ll be happy to help.
Usually, a construction loan payment plan is divided into five stages. These stages are:
The first stage of construction includes laying down the property foundations, levelling the ground, installing the initial stages of plumbing and adding waterproofing to the foundation.
This stage consists of setting up/building the frames of the home, including partial brickwork, windows, trusses, and roofing.
This is when the exterior of your home starts taking shape. It involves setting up external walls and doors, finalising any roofing that may not have been completed previously and setting up lockable doors and windows.
With the skeleton and major muscles in place, it’s time to put in some of the major organs. In this case, more plumbing, gutters, electricity, internal fixtures and fittings, and lights. At this stage, the builders might even start working on things like cupboards, benchtops and so on.
The final stage of construction is when the builder starts putting in the finishing touches for the home. This includes final plumbing, electricity, painting, cleaning and final payments for equipment and builders.
Have more questions about the payment process? Send us a message.
Potentially. If you have enough equity in the land you’re building on, or in another asset like your family home or an investment property, you may be able to borrow the amount you need without using the building under construction as collateral.
The advantage of redrawing from an existing loan is that you will have access to the full amount and can pay off all the construction work as it comes along. This can include small incidental costs as well.
The potential downside to this is that you will immediately start paying off the interest of the full amount.
As with any borrowing, there are some risks involved in taking out a construction loan.
Rest assured though, that the right construction loan can help mitigate these risks.
The approval process for a construction loan is quite different from a normal home loan. Including the usual documents, you will also need to provide:
Construction loans can be complicated, especially if you’ve never applied for one before. But don’t let that dissuade you. Let’s have a chat and see what we can do to help you get that much closer to building your dream home.