If you’re thinking of building your own home, you’ll need to be familiar with the ins and outs of construction loans.
Construction loans are not as straightforward as standard home loans. There are additional decisions to be made about the structure of the loan, additional documentation is required, and the funding is released in an entirely different way.
Documentation
In addition to documentation about your finances, income and identity, your application for a construction loan needs to include contracts or tenders for the construction, as well as the plans so that a valuation can be performed.
Further documentation will also be required before the first payment is made from the lender to the builder, including a schedule of the payments to be made (called drawdowns), the builders’ insurance details, and the final plans that have been approved by the local council.
Structure
To avoid having to contribute your full deposit and being charged interest on the entire loan amount from the moment the land purchase settles, you can split your mortgage into a land loan and a construction loan.
At the settlement of the land purchase, you start being charged interest and making repayments on the balance of the land loan – you may also be required to pay lenders mortgage insurance (LMI) depending on your deposit size.
The interest and repayments on the construction portion then kick in only as each drawdown is processed. E.g. If the slab portion is $50,000 you only pay interest-only repayments on the $50,000. If the next progress payment is $75,000 then you will pay interest only repayments on $125,000 (Slab: $50,000 plus Frame: $75,000 = $125,000).
Funding
The drawdown schedule is very important; as you don’t start paying interest on each portion of the loan until it is paid to the builder, you, the lender, and the builder need to be satisfied with the schedule.
Typical stages of construction:
Stage | Description | Percentage |
Deposit | Plans, permits, insurance | 5% |
Base/ Slab | Concrete slab, footings, base brickwork | 10% |
Frame | House frame complete and approved by building surveyor | 15% |
Lock-up | Windows, doors, brickwork, insulation roofing | 35% |
Fixing | Plumbing, electrical, painting, etc. | 25% |
Final/ Completion | Fencing, site clean-up, final payment | 10% |
The builder will send you the invoice for each payment and you can then forward it to the lender with your progress payment form. After the lender is satisfied that the work has been completed and is up to the standard expected in the valuation, the drawdown can be completed with payment to the builder.
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