Construction Loans
Building a brand-new home, or making major renovations on an existing home are exciting projects to undertake as homeowners. If you’re planning to build or give your existing property a major facelift, it may be worth considering a construction loan.
Buying Land
Before you can build your dream house, you need some place to build it. Buying land is the first step on the road to building your new home and there are a couple of different ways this can take place.
DIY Land and Construction
This involves first of all finding a block of land that you like and having an offer accepted to finalise the purchase. Then you need to find an independent builder who will build your home just the way that you want it. Or, if you are looking to wait a bit before building your home. If you are going to buy land and have it settled before you decide on a house to build, it is recommended to get pre-approval for the construction to ensure there are no surprises with the lender when it is time to build.
House and Land Package
This is the process where you secure both the land and construction at the same time, but through two separate contracts. Generally, the builder or developer will have a select number of builders and designs that are on offer for you to choose from and make minor amendments.
Construction Loans
Construction loans are drawn down in stages as your property is being built. This means that your monthly mortgage repayments slowly increase as the construction moves forward. This process is helpful as you may still be paying rent at another location while your home is being built. Most lenders will offer interest-only repayments during the construction process which will revert to principal and interest repayments once the construction is complete.
To qualify for a Construction Loan, you will need to have council-approved plans and a fixed-price building contract or a tender from a licensed builder. This is to ensure that the building is legal and within the council's requirements and the fixed price contract is to ensure that the builder will not charge you extra at a later date.
What are Drawdowns/Progress Payments?
In a construction loan, your builder is usually paid in drawdowns (also known as progress payments) which occur when part of the work is completed.
Builders will usually send you a progress invoice each time a progress payment is due. Your lender may also require you to sign a progress payment form that they will provide. You would need to send this form to the lender along with the progress invoice. Once the progress payment is approved by the lender, the builder is paid directly from your loan account.
Many construction loans have approximately five drawdowns. These drawdowns are often at the following stages but may vary depending on your contract:
1. Deposit
This is generally paid after you have had your loan approved before any building starts and the loan commences. This allows the builder to finalise the plans and any variations. The builder will then send the proposal to your local council for building approval.
2. Slab Complete
This is the stage where the foundation is laid. It includes measuring out the design on the site, pouring the footings and foundations, under slab drainage moisture barrier and termite protection.
3. Frame Complete
This includes the installation of internal and external support structures, including walls, conduits for electrical and plumbing, the roof frame, sheeting, gutters and insulation.
4. Lock Up Stage
It is at this point that all windows, doors and remaining walls are completed and you can quite literally "lock up" the property.
5. Fit Out Stage
All the internal work such as plumbing electrical (including lights and power points) and other fixtures and fittings will be completed. This also includes things like cornices, tiling, cabinetry and shelves, all the features that make a house a home.
6. Practical Completion
All painting and installations are complete and you are ready to move in.
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