Having a house built to your own specifications, or choosing the perfect house and land package, are possibly the best routes for getting a home that’s just right for you. And to make your dream a reality, you’re going to need a construction loan. Compare your options right here.
By Yvonne Taylor | Updated 18th March 2020
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It’s a specific type of home loan designed for borrowers who are having a house newly built for them, rather than buying an existing property. It differs from a standard home loan in several ways:
Yes. It is the best type of loan to apply for in this situation.
Yes. But if you already have a loan secured on the land it may be more difficult to borrow a significant percentage of the estimated final property valuation. You’ll also end up with two separate mortgages.
Yes. Some lenders offer construction loans for this type of work.
This is a type of loan designed for people who want to DIY the building themselves, or organise some or all of the work to be done by building sub-contractors. Lenders usually see this kind of loan as very risky, since they will be using the property, once completed, as security for the loan. If you do manage to secure this type of loan, you may be able to borrow only a relatively small percentage of the estimated property value (e.g. 60%).
Yes. The borrower will want to see construction beginning as soon as possible after land is purchased, if land purchase forms part of the loan. There will also be a time limit allowed for completion of the construction once it starts, typically 12 months, although it could be as short as six months and as long as 24 months, depending on the lender.
There are normally five or six recognised stages of the construction that will qualify for progress payments:
The lender may send a valuer to check that the work has been completed to an approved standard before they release each progress payment.
As each progress payment is made by the lender to a third party (e.g. land owner, architect, builder) your loan amount will increase, until it reaches its maximum amount once the building is complete.
Often, though not always. If the lender does charge for making progress payments, they could charge a one-off fee for making all the progress payments (e.g. $500), or charge a separate fee for each payment (e.g. $200 x 5).
In addition to the normal documentation to prove your identity and income, you will need to provide the lender with building plans approved by the local council, a fixed-price contract from your builder, and evidence of builder’s insurance.
Interest rates could be higher during the interest-only phase of the loan while the home is being constructed, but may revert to a standard rate when the building is completed and repayments start to include a portion of the loan principal as well.
If you want to make changes to the building contract or the approved building plans, at any stage after your loan is approved, you will need to contact the lender to discuss the changes and make sure they are happy with them.
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