Construction loans

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

Comparing construction loans for $450,000.00 over 30 years.

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What is a construction loan?

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:

  • The amount you can borrow, as well as being based on your income and credit rating, will also be calculated as a percentage (e.g. 80%) of the expected value of the house and land when the building is completed.
  • Instead of borrowing this amount in full immediately, borrowers draw down progressive amounts so that they can make payments for the purchase of the land, stamp duty on the land, payments to the architect (if any), and progress payments to the builders as the construction proceeds.
  • Construction loans are typically interest-only for the first 12 months, after which time they revert to the standard pattern of repaying both principal and interest. But you may be able to retain it as an interest-only loan if you wish, depending on the lender.

Will I need a construction loan if I’m buying a house and land package from a major building company?

Yes. It is the best type of loan to apply for in this situation.

If I already own a block of land (with or without a mortgage) can I still apply for a construction loan?

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.

Can I use a construction loan for carrying out major renovations or remodelling on an existing property which needs a lot of work before it can be occupied?

Yes. Some lenders offer construction loans for this type of work.

What is an owner-builder construction loan?

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%).

What are the benefits of using a construction loan, rather than a traditional home loan, when having a home built?

  • The loan is normally interest-only during the construction period. This keeps your repayments low when you may be renting, or paying another mortgage on your existing home before you can sell it and move into your newly-built home.
  • The builder does not receive an upfront lump sum, but progress payments which depend on work being completed in a timely and satisfactory way.
  • You pay interest only on the amount drawn down while the house is being built, not the full loan amount.

Are there limits on the time allowed for the construction to be completed, when using a construction loan?

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.

When are progress payments made to the builder during a construction loan?

There are normally five or six recognised stages of the construction that will qualify for progress payments:

  • Deposit: The first deposit to the builder, before construction begins, not always required
  • Base or slab completed: Ground levelling, external plumbing, waterproofing, pouring slab
  • Frame completed: Timber or steel frame erected, roofing, trusses, window frames, possibly some brickwork
  • Lockup stage: External walls, windows, doors
  • Fitout: Internal fixtures like plasterboards, internal plumbing and fittings , electricity, gutters, cupboards, kitchen benches
  • Completion: Concluding stages, finishing touches, cleaning

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.

Is there a cost for making the progress payments?

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).

What kind of paperwork is needed when applying for a construction loan?

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.

Are interest rates for construction loans higher than the rates for normal home loans?

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.

What if I want to make changes to the house and the building contract after my construction loan has been approved?

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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