If you’ve decided that you want to build your dream home, or if you absolutely love your current home but want to update or extend it, you may find that a construction loan is the ideal choice for you. Construction loans are different to a traditional purchase, so we’ve put together some things to consider when going down this path.
What is a construction loan?
You would need a construction loan if you were building a new house or doing major structural renovations to your existing home and you are seeking finance.
The payment scheme is different to a traditional home loan as the lender releases funds on the completion of each stage of construction. Generally, for the construction of a new home these five stages are:
- Slab down – laying the foundation
- Frame up – building of roofing and brickwork
- Lock up – installation of windows and doors
- Fixing – putting in place the internal fittings and fixtures
- Completion – adding finishing touches and the final cleaning of the property.
After each of these stages are completed, your lender arranges an inspection by an independent valuer. If the valuer is satisfied, the lender will release the funds to the builder for the work completed.
Interest is calculated only on the drawn balance of the construction loan. When construction is complete, your repayments revert to principal and interest repayments on the entire loan balance.
What documents do I need when applying for a construction loan?
You are going to need to supply all of the usual financial documents that are required when applying for a mortgage. These include bank statements, tax return, payslips. On top of this, when applying for a construction loan, you will need to provide:
- Contract of Sale for the land (if purchasing)
- And your signed building contract including the specifications and plans.
What costs are there?
If you’re building a house you will need to pay stamp duty on the land, there may be concessions available if you are a first home buyer. And if you have less than a 20% deposit on the finished build value, then you will need Lender’s Mortgage Insurance. (LMI) There may also be a valuation fee payable at each stage of construction.
Have a chat with one of our friendly brokers to see what specific costs will apply to you.
To help offset these initial costs you may be able to secure a loan that offers interest only repayments during the construction period.
Other things to consider
- Your lender is going to want a valuation on the land and completed building on an “as if complete” basis to determine your loan-to-value ratio or LVR. They may also require a valuation at every stage under the building contract before releasing the funds to the builder.
- Your lender will also need to approve your builder, so it’s important to choose a highly regarded builder who has the correct credentials. (this doesn’t occur for residential builders typically.)
- Try to avoid making variations to your build contract. This could result in your lender wanting to reassess your loan, which in turn could result in a delay.
- Be aware when building, most people go over budget, so allow a contingency for cost overruns.
Building your dream home or adding value to your current home is very exciting, but with so many people involved there is the potential for things to go slightly off plan!
At Seek Financial we like to be pro-active and look for any problems before they arise so that we can prevent them from ever occurring. To avoid extra costs or unexpected surprises contact us today and we can talk you through the entire process, answer any questions you may have and explain exactly what to expect.
The above information is general in nature. It has been prepared without taking into account your objectives, financial situation or needs.