A Guide to Construction Loans

24th Mar, 2021 | Construction Loan

In this article:
Understand how construction loans differ from regular loans, the various stages involved and things to be mindful of while looking for one.

As per the latest ABS data, construction loan commitments rose from $1.69 billion in Jan 2020 to $ 4.074 billion in Jan 2021, recording a threefold surge – making it one of the most significant spikes in recent times. Constructing your residential property offers many benefits like customisation, better construction quality and, in a lot of cases- tangible cost benefits. Securing suitable finances is a crucial aspect of maximising return on any construction project. Here’s a quick guide on construction loans and things to be mindful of while applying for one.

What is a construction loan?

As the name suggests, a construction loan provides funds for the building of a property. The two most significant differences between a regular home loan and a construction loan are:

  • With a home loan, you receive the entire loan amount for purchasing a property upon loan settlement, while the latter, you receive phased payments from your lender as per the different stages of construction.
  • Regular Principal and Interest repayment for a construction loan generally begin once your property is nearly built- which usually takes anywhere between 12 to 24 months. On the other hand, with a regular home loan, repayments begin almost immediately after the settlement of your loan.

Whether it’s your dream home or a cosy cabin, we’ll find you the right loan.

Steps involved in a Construction Loan

#1 Applying for the Loan

At this stage, the lender with assess your credentials as a borrower and examine your construction contract. Whetting your credentials include reviewing your income, living expenses, employment stability and credit score. To assess your construction contract, lenders usually look at the property’s increase in value after construction. In the case of an investment property, they may also consider future rental yield. Lenders generally require builders to provide documentation like construction license details, council approval for the construction plan, insurance and construction schedule.

#2 Phased Payments

Once your application is accepted, your lender will release phased payments as per competition milestones. Here’s a list of general completion milestones most lenders follow

  1. Site Prep: Depending on your land parcel, this could involve demolition, site levelling, clearing of old debris, soil testing and other measures to prep the site for construction.
  2. Foundation: At this stage, your builder will proceed with measurements for construction plans and designs. Other steps include laying of the house foundation, under site drainage and mesh protection from termites.
  3. Frame set up: This involves putting in place the property’s internal and external support structure along with conduits for plumbing and electrical connections.
  4. Lock up: As the name suggests, this allows for ‘lock up’ fittings like doors and windows. At this stage, all plumbing and electrical work can be initiated.
  5. Completion: This is nearly the final stage and involves painting and the last inspection to install any additional fixtures and appliances.

Payments range from 5 to 20% at each stage and release as per invoices provided by the builder.

#3 Repayments

Once the construction nears competition, your loan functions as a regular loan and requires you to make regular repayments. An important point to note here is that your repayments may begin at the lockout stage. Also, during the construction stage, you may need to make ‘Interest only’ payments, while after the construction is completed, your repayments will include both components of interest and principal.

Tips

  • Maintain income and employment stability.
  • Ensure a good credit score.
  • Look for a construction loan with good features like:
  • Offset account
  • Redraw facility
  • Flexibility in construction time – 12 to 24 months
  • Ability to make larger repayment
  • Option to increase repayment frequency

Construction loans are complex and the most straightforward approach to make the most of them is to rely on professional guidance. A mortgage broker is paid by a lender upon settlement of a loan. Mortgage Broker services are, therefore, free for borrowers. In addition to scoping the market for the right match for you, a broker will also handle all your loan paperwork.

Reach us for the best way forward as per your circumstances.

The information is a compilation from various sources for your benefit and should not be relied upon in lieu of appropriate professional advice.