If you have done your background check, and prefer building a new home in Australia instead of buying an already built home, then, a construction loan is for you. Interestingly, the good thing with a construction loan is that apart from securing for building purpose, you can also secure it for making key renovations to an already existing property that you had bought for a home.
What entails a construction loan?
The main purpose that people secure a construction mortgage is for setting up a home on a piece of property. The good thing about a construction loan is that it allows you to buy a vacant land initially, and then arrange how the home will be built on that land parcel in a specific period.
Therefore, when securing a commercial loan, expect it now to operate the same way as any other mortgage. The lender will consider the total amount that a builder needs to be paid and later broken down into progress draws (separate payments). It represents portions of the mortgage funds that will be paid out continuously as the construction process goes on to the builder to cover the total building construction amount.
Majority of lenders can request Interest due on drawn amounts be paid as the progress continues. However, construction loans enable you to save the interest as the construction procedure goes on since the handover of the new home has to be done and keys received for you to begin interest and full principal payments.
Owner-builder mortgage
For those people who don’t want to engage a licensed builder to help them in the building of their home, this kind of loan is designed to cater to their needs. However, many lenders and banks prefer not to accept these kinds of home loans applications. Owner-builder mortgages as seen as high risk by many lenders since the security for the mortgage will be that property.
In cases where the lenders choose to approve the owner-builder mortgages, the loan is usually limited to around 60% of the construction cost and the total value of the land. As part of the valuation, the lender will account for the vacant land in the total value but rarely the actual completed home value in factoring the security property’s value for the owner-builder loan. An estimate of labor and materials cost undertaken in the construction process is what lenders consider.
Who does construction loan suit
Any borrower that wants a loan to construct a new home on a bare land qualifies for construction loans. Such loans may also cover for major renovations that can be done on existing homes or purchasing a land package and house from any licensed builder.
In case of building some properties, property developers may also be able to access these for small-scale developments. However, if the building properties in large numbers, lenders may advise them to access commercial finance instead as it will be considered as a large-scale development.
How construction loans work
Construction loans differ with other regular home loans in that the mount is paid in progress payments instead of a lumpsum loan settlement amount. Lenders will usually disburse the progress payments during the period during the construction stages.
Normally the progress payments are usually five namely;
- Slabs poured,
- Frame-up,
- Brickwork complete,
- Lock up and
- Practical completion.
Before releasing the subsequent payment, lenders will engage a valuer to do a handy double check to see whether the work has been completed to the acceptable standards. The drawdown is the progress payment is the amount on which interest will be paid. For instance, let's say a lender approves a $350,000 loan that becomes drawn down to $90,000. In such a case, interest will be levied on the $90,000 until a point where there are further drawdowns.
During the construction process period, the loan repayments that are requested are usually interest-only. It helps minimize the repayments pressure during the construction time which is usually stressful and expensive thereby providing home builders and renovators a sense of security and comfort. After the construction process is complete, you have the option to keep your loan as an interest only or revert it to interest and principal one, but it all depends on the lender and the loan terms.
What to consider in construction loans
Unlike the application the traditional home loans, application for a construction home loan usually involves more stringent eligibility criteria. As a borrower, you will need to have a very good credit history to access construction home loans as lenders fear inherent risks.
Most lenders will request a deposit of 20% of the cost as the initial down payment especially in cases where no building has been set up on the building lot of the land.
Apart from the cost, you will need to check whether it is necessary to purchase a land package and a house to obtain a loan. You can obtain a construction loan when you have licensed builder who can sign a building contract. Therefore, a land package and house are not necessary to acquire this type of a loan.
Before a vast majority of lenders and banks can extend to you a construction loan for your home, they will require you to select a good licensed builder. But other lenders can allow you to access an owner-builder loan for constructing your home if you possess a building license or are a qualified businessperson.
After amendment preparations for your home, the contract price might go up. Such cases where the building contract changes usually make any construction loan to be expensive than anticipated. Afterwards, the reassessment of the loan value that the builder will make will make the circumstances to be even more difficult. To eliminate such a problem, you can
- Complete the contract before forwarding it to the lender.
- Simplify the changes for the bank to minimize the delay process.
- If the changes are massive, consult the lender for loan review and request for discount reimbursements.
It is always good to know the building contract and understand the kind of construction loan that will suit the construction process. If you get a grasp of the construction loan and whether it is necessary for financing any construction project you will be able to undertake your construction work effectively in the set period.