A construction home loan is for those who are building their own home as opposed to purchasing an existing property. You may also apply for a construction home loan if you are intending on making major structural changes to your existing home.
A construction loan generally involves more paperwork and processes than a standard home loan due to the additional number of parties involved such as your builder, architect, council, surveyors and other contractors. Due to the additional steps involved in the construction home loan process, it is important that you partner with construction home loan specialists to help put your best application forward.
When applying for a home loan for an existing property, you are borrowing the amount required to cover the purchase price of the property, plus fees. Once approved, the loan amount is paid to you in full. With a construction loan, it is generally broken into two components. Firstly, for the cost of the land, and secondly the cost of construction. Instead of the loan being paid to you in full, it is broken down into part progress payments as the build progresses.
A construction home loan also generally an Interest Only loan whilst the construction is underway. The loan will then revert to a Principal and Interest loan once construction has been completed and the final progress payment has been made.
When taking out a construction loan, the loan payments will be paid in part progress payments as you reach each stage of your build. Banks set progress payments to ensure they are covered, and that your building is progressing as planned. In general, there are set stages that the progress payments will be paid to you. However, it is best to check with your lender as they may vary from lender to lender, as well as with individual builds. Payments can be sent directly to your builder straight from the bank.
Construction home loan progress payments are generally set on a five-stage schedule as follows:
Covers your deposit, the levelling of the ground and laying your foundations.
Covers building the frame of your property including partial brickwork, roofing, trusses and windows.
Covers the external walls, doors and windows so enable your home to be ‘locked up’.
Covers the plumbing, electrical, fixtures and fittings to be completed.
At this point all painting, installs and detailing of the entire property have been completed and you are ready to move in.
Some progress payments can differ and run over a six-stage schedule. The length of each stage will be dependent upon many factors and will vary from builder to builder. You can expect anywhere from between 6-12 months for the construction. Be sure to refine the time expectations for each stage and discuss with your lender.
Upon completion of the build, your lender will arrange for a final inspection to ensure the build has been completed as per the specifications and contract.
Your bank may request to see certain documentation once you reach each progress payment stage. This may include on-site inspections and property reports and valuations to ensure the building has met the proposed plans and specifications as per the construction loan terms.
There are generally always unforeseen circumstances that arise when undergoing a new home build. If there is a change to the original scope of work, you will need to provide documentation about the variation to your lender prior to the works being carried out. This is extremely important! If you carry out the works prior to approval to the variation, you run the risk of not having the funds approved to pay for the additional works. Once submitted, a new valuation may be required.
Do note, any major changes to the construction loan will add additional time to your overall build. Be sure to discuss any variations to the build with both your builder and your lender prior to any works going ahead.
If the additional works required are minimal, it is advised to try and pay for them out of your own funds. This way, you will not be altering your existing construction loan contract. If the works are substantial, then speak to your lender first before proceeding.
You cannot apply for a construction home loan if paying in cash. A contract between yourself and your builder must be signed and supplied to your lender to commence a construction home loan application.
If you are an owner builder, as in you intend on building your home yourself as opposed to using an outside builder, you will be viewed as a greater risk to your lender. That’s not to say an owner builder construction loan isn’t possible, there just may be greater restrictions and more hoops to jump through. The banks use the property as security against your mortgage, so without a built property to do so – the higher the risk. So keep in mind, as an owner builder, you may be required to front up a greater deposit amount of anywhere up to 40% when applying for your construction loan.
At Organic Home Loans, we assist with construction loan applications so you can get started on your new dream home build. We cut through the red tape and provide you with the facts. The more informed you are about banks’ expectations and requirements, the greater your chance of a successful outcome.
Let our home loan experts help you get into your home faster!
