Construction loans: What are they and how do they work?
What is a construction home loan?
A construction loan is a type of home loan designed for those who are building their own property instead of buying an established home. Construction loans are structured differently to ordinary home loans and commonly operate with an incremental progress payments.
These are paid by the lender to the borrower throughout each of the stages of construction. The amount that is available for home-owners to borrow is typically determined based on the final value of the property once construction is complete.
How do construction loans work?
Once a construction home loan has been approved by your lender, you, as the borrower will be able to draw down on this loan to receive progress payments at each of the five stages of the construction of your new home.
Most commonly, progress payments are made by your lender at the completion of these five stages:
– Slab down stage: This progress payment is designed to cover the costs of laying the foundations for your new home as well as levelling the ground or clearing your block.
– Frame stage: This progress payment assists in covering the costs of the frame of your home as well as brickwork and roofing.
– Lockup stage: This progress payment is designed to cover the costs of putting in external walls, doors and windows which enable your new home to be ‘locked up’.
– Internal fixtures stage: This progress payment covers the costs of installing plumbing, electricity, gutters, cupboards and built-ins.
– Completion stage: This progress payment pays for any finishing touches added to the property such as painting or cleaning as well as certain finishing costs of tradesmen.
The repayments and interest that you are required to pay on a construction loan will be based on the amount you have drawn down on as opposed to the total amount of the loan.
How to get a construction loan
Applying for a construction loan is a slightly different process to applying for a regular home loan. To successfully apply for a construction loan, you will need:
– Your building contract: This will outline the stages of construction, the timeline of construction and how much it will cost to build the home.
– Your building plan: This will include the layout of your new home, the size of the property and surrounding boundaries as well as the materials and finishes which you intend to use during construction. A property appraiser will inspect these plans to determine the overall value of your property upon completion.
– Quotations: These include quotations for additional features to be added to your property after the initial construction is complete, such as pools, outdoor entertaining areas or solar panels. Quotations help lenders to determine whether there are any value-adding features to your home which may increase your borrowing power.
The lender will then offer a loan amount which you have to approve before making a deposit, as you would on any other home loan.
