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If you’re building a new home or embarking on major renovations, you might be wondering how finance works for these types of big projects. Constructions loans have been designed specifically for this purpose, with several features that assist borrowers through the construction process.
Is it easy to get a construction loan?
Applying for a construction loan is more involved than your standard home loan application. Not only will you need to provide your financial details for assessment, but your lender will also need to see all documents relating to the build. Documents could include the building contract, council approved plans and evidence of your builder’s insurance. You should also provide any other contracts for additional work completed, such as driveways, fencing, pools or landscaping.
A registered valuer values the property (as if complete) as part of the construction loan application. Generally, this amount will be the vacant land value plus the construction value. However, valuers also consider several other important factors when determining the final value.
- Useful reading: Renovation budget blowout: How to avoid
How much deposit do I need for a construction loan?
Depending on your location, most lenders will allow you to borrow up to 95% loan to valuation ratio (LVR) for the build or renovation. However, you may be required to pay Lenders’ Mortgage Insurance (LMI) if you don’t have a 20% deposit. Your contribution will be paid to the builder or contractor before any loan funds are released.
- Useful reading: How much do I need for a deposit: will 5% do?
Whether it’s your dream home or a cosy cabin, we’ll find you the right loan.
What is a progressive drawdown?
Progressive drawdowns fund a construction loan. There are usually five staged progress payments designed to be released in line with the value of work completed. Your building contract will outline when each progress payment is due, and the amount required at each stage. Your lender will review this information to ensure it fits their lending guidelines and criteria for construction loans.
The stages could include:
- deposit (paid by you)
- base or slab stage
- practical completion.
An invoice will be issued for each progress payment which you’ll need to forward to your lender. They will conduct their checks; drawdown on your loan, and make the payment to your builder or contractor. Your lender may charge a fee for each drawdown.
There will usually be a valuer attend before the final progress payment release to confirm the expected valuation of the property stacks up.
If you make changes or variations to your build that increases the building contract’s price, your loan may need to be reassessed if you don’t have the funds to cover the variation.
How are my repayments calculated during construction?
Borrowers are only required to pay interest-only payments while the loan is still in its drawdown phase. And you’ll only pay interest on the amount that has been drawn. Once it’s fully funded, you’ll start making regular principal and interest repayments as stipulated in your loan contract.
As the construction loan is interest-only during the build, you may find yourself with a higher than usual interest rate. It’s important that when your loan is fully drawn, we review the home loan and ensure it’s the best one for you with the most competitive rate.
- Useful reading: When was the interest rate on your home loan last cut?
What government rebates/schemes can I apply for?
There are several government-funded incentives for new builds.
- HomeBuilder: The HomeBuilder scheme was part of the government’s economic response to the coronavirus pandemic and has recently been extended to 31 March 2021. This $15,000 grant is for new builds or substantial renovations. Eligibility criteria apply, which includes property value and income caps.
- First Home Owner Grant: Most states and territories offer an incentive payment to first homeowners when they choose to build a new home. This is usually paid at the same time as the first drawdown of the loan.
Don’t put construction loans into the too hard basket
We take the confusion out of construction loans and help borrowers get into their new home sooner. Call our Yellow Brick Road Mortgage Brokers to discuss your options.