Construction loans of the residential variety, are specifically targeted toward people building a new home for themselves.
They’re generally available for building new owner-occupied homes, but can also be obtained to fund renovations and extensions, of an existing residence.
See Development Loans if you are an investor seeking a loan to develop rental properties on a single residential title, and you intend to retain the new builds as investments.
See Commercial Loans if you are a property developer seeking a loan to construct properties to be sold as a profit-generating venture.
How They Work
Construction loans provide progressive payments to the builder as and when they complete each stage of the build component of your new home. They are never provided upfront as a lump sum.
Generally, the following are the five key stages in a residential construction project:
- Footings/Foundations
- Framing
- Lock-up
- Fit Out
- Handover
Construction loans are generally written as principal and interest loans, however, during the construction period, repayments interest only.
Once construction is complete, and all progress payments have been made to your builder, you will begin making principal and interest repayments. This usually commences one month after the final progress payment has been made.
Construction Loans – Advantages
1. In making progress payments, you cover yourself against significant financial loss should building works cease for any reason. Progress payments within construction loans ensure the work on each stage is completed to a satisfactory standard before work on the next stage commences.
2. As you are only making progress payments, you only pay interest on the amount you’ve drawn down from your loan at that point, thereby reducing your outgoings during the building process.
3. As most lenders allow you to make additional payments to construction loans, you can further reduce the overall amount of interest you will pay, over the course of the build.
Construction Loans – Disadvantages
1. Construction loans usually have a higher loan-to-value ratio requirement. Therefore, you will be required by your lender to have a larger deposit than needed for a normal housing loan.
2. Typically, lenders need to inspect work carried out before they’ll release a progress payment. This process can be time-consuming and result in inconvenient delays.
3. Construction loans often attract higher interest rates, so it’s a smart move to engage the services of a Melbourne Mortgage Broker to help you shop around, so you don’t end up paying more interest than you should.
4. Construction loans are more complex than a normal residential mortgage loan. As they necessitate three-way communication between you, the lender, and your builder they usually take longer to put in place.
Qualifying for Your Loan
In addition to disclosing your income, monthly expenses, and assets, for construction loans you will need to provide your lender with your building plans and your builder’s credentials for their scrutiny.
Using the plans, a property appraiser will work out the expected value of the property when it’s completed, and from this figure, determine how much money you’ll need to borrow to pay the builder.
If you’re paying a registered builder to build your home, you’ll likely need to provide:
- A copy of the signed industry-standard fixed-price contract and an acceptable progress payment schedule
- A copy of building plans, specifications, and permits
- A receipt for any deposit paid to the builder or suppliers
- A copy of the builder’s licence
- The builder’s bank account details for direct credit of progress payments
- Copies of builder’s insurance policies.
You will also need to hold the lender’s required deposit amount and may need to pay the Lenders’ Mortgage Insurance.
Application Process
Once you have fully completed your construction loans application (your Melbourne Mortgage Broker will assist you to do this to make sure nothing has been omitted), you need to submit it to your lender.
Your lender will in due course, determine if your application for a construction loan from them, meets their lending criteria.
If it passes this critical test, your lender will most likely order, at your expense, a formal valuation of the proposed construction, to ensure that upon completion, it will be worth what you have indicated its market value will be. This valuation will also impact the maximum amount the lender will be willing to lend to you.
If your lender approves your construction loan, they will provide you with a loan offer, details of the terms and conditions under which the loan will be granted, details of any other documents required immediately or progressively as your loan is drawn down, and any other requirements that they may have that you will be required to meet.
Conclusion
Construction Loans are a means of financing the construction of a new home on land that you own or financing renovations and/or extensions on your existing home. Construction loans involve progress payments to your builder as well as stage inspections and sign-offs, and the entire process of applying and qualifying for these loans is more complex than a standard mortgage.
The assistance of a mortgage broker can be of great assistance if you are not well versed in these processes. Contact us (Oz Lend), and we will help you to source your construction loan in Melbourne.
