When it comes to applying for a construction loan in Australia, there is plenty of choice. But with that plethora of choice, there is still the need to do your research to sort out the good from the bad and with so many potential lenders to choose from, it’s a great reason to hook up with a professional loan specialist to help you weigh up the positives against the potential negatives to find a construction loan that’s ideal for you.
What is a construction home loan?
It’s a type of home loan that is specifically designed for people preparing to build a home, rather than buy an established property. With the unique needs of home-builders in mind, construction home loans operate under a different loan structure than home loans designed for people purchasing an existing home.
Typically, a construction loan includes access to a progressive draw-down facility. Simply speaking, it enables you to draw down the loan (or increase your borrowing) to pay the construction progress payments, as needed.
Just how much is available to borrow depends on what the value of the property will be when construction is complete. It’s standard for a construction loan to be interest only throughout the first 12 months of the loan’s lifetime (or until construction is completed), before it reverts to a standard principal and interest loan after that.
To help you understand what’s on offer and how to find a great value construction loan, here are some basics you should know:
How progress payments work
Once approval for your construction loan is confirmed and the construction of your property commences, your lender will make progress payments throughout the key stages of construction.
Generally speaking, it’s standard for these progress payments to be made payments at the completion mark of five key stages of the build.
The five stages of construction for progress payments are:
1. Slab down (base): This initial amount helps construction commence, as you lay the foundation of your property. The payment covers the cost of levelling the ground and the associated plumbing and waterproofing for the foundation.
2. Frame stage: To help build the frame of your property, this stage 2 progress payment covers partial brickwork, trusses, roofing and windows.
3. Lock-up: The third progress payment covers the costs of external walls, as well as the installation of windows and doors that brings your home to the lock-up stage.
4. Fit-out: Payment to cover costs of the internal fittings and fixtures of your property, includes plasterboards, part-installation of benches and cupboards, as well as all internal plumbing, electrical wiring/switches and gutters.
5. Completion: To cover the completed delivery of all contracted items, including builders, equipment, finishing touches and post-construction cleaning brings your property to the final stage.
At each key time the loan is drawn down, the interest and repayments are calculated on the funds used to date. So, if at the fourth progress payment, a total of $300,000 has been drawn down, on a $375,000 loan, the interest would only be charged on the $300,000 amount.
Most lenders require you to have used up all your available equity before releasing the next payment instalment. The expectation being that the final payment by the lender will see the loan being fully drawn.
Some potential risks include:
- Home not completed on time or on budget
The down-side to this scenario is that, while you wait for your build to be complete, you may be out-of-pocket for additional rental accommodation costs or bridging finance to extend your construction loan.
- Value of completed home will not match cost of building it
If the builder does a poor quality job, or the property market crashes, you may need to find additional cash to cover refinancing the construction loan into an end loan.
- You may not qualify for an end loan
If your ability to earn your usual income changes, you could become unable to qualify for the all-important end loan – a situation that can leave you in a perilous financial position.
Construction loans are not meant to be a permanent mortgage solution, so without access to the end loan to help you become home-owners, it’s a potentially big problem that must be solved.
It’s important to remember that you are the customer and looking for a construction loan solution that meets your individual circumstances is something you should take seriously. By engaging with a construction loan specialist, you can shop around for a competitive interest rate to find the best possible deal to suit your lending needs.
For more information about applying for a construction loan for your next building project, talk to our team at Lending Specialists today.