Mortgage Choice logo
Michael Cullinan

Construction Loans

August 30, 2024 by Michael Cullinan

What are construction loans?

Construction loans are different from regular home loans due to building works requiring ongoing payments as the construction progresses.

In the case of a traditional home loan, the total of funds will be made available in a single lump sum, while a construction loan lets borrowers draw on the loan balance when payments need to be made to the builder.

These payments are made at key stages of the building process, and are known as progress payments.

 

Home Owner vs First Home Owner

The attraction of building a new home depends on the buyer.

For a homeowner, it can be cheaper or more feasible to knock down their current home and build a new one.

First home buyers are often drawn to the option because it allows them to take advantage of First Home Owner Grants and other concessions, like the recently announced $25k Home Builders Grant.

If you’re wishing to build a new home or upgrade the place you live in now, you will require a construction loan, which differs from a home loan for the purchase of an existing property.

A construction loan is structured around the building process, with borrowers able to balance when payments need to be made to the builder.

 

How to apply

To apply for a construction loan, the lender will need a copy of the building contract/tender and the plans. They will also require an estimate of the potential market value of the completed property (generally done by a valuer on behalf of the lender).

During the construction process, some lenders will require ongoing valuation and inspections before they pay the next instalment, to ensure everything is on track and within budget. This gives you peace of mind that builders or contractors are not being paid for incomplete or unsatisfactory work and it keeps them accountable.

Due to the loan being progressively drawn down, you’re generally only charged interest on the funds used so far. That means that if you have a $400,000 loan and you have only drawn down $100,000, you’ll only be charged interest on that $100,000 amount.

 

Some Advantages of Construction Loans;

You get to build a house according to your preferences, including layout, colour scheme and the like.

An advantage of a construction loan is that the construction period is interest-only, which minimises your repayments and saves you money. It's also done this way as you still have to live/rent elsewhere whilst your construction is underway.

At the end of the construction process, your loan can be reverted to a principal and interest mortgage.

 

Some Disadvantages of Construction Loans;

A lot comes down to what is and isn’t in the actual construction, known as inclusions. Often builders don't include items like fences, landscaping, window furnishings, driveways etc in the actual build project. These can be extras that you need to pay for at a later stage.

While construction loans offer many advantages, there are some drawbacks to consider. Firstly, lenders will want to see all the paperwork, such as council-approved building plans and building contracts, before they approve a loan.

Secondly, you may need a bigger deposit in order to be approved for a construction loan, as loan to value ratios are generally higher. In addition, you will have to factor in additional funds for finishing touches on your new home, as well as rent if you need to live elsewhere during the construction period.

 

Some resources to help guide you;

Do some basic sums with our home loan calculators

Watch our Money Chat videos for extra guidance

 

At Mortgage Choice, we take a personal approach that is tailored to your own situation

Please call me on 0447 528 116 or email me at michael.cullinan@mortgagechoice.com.au

Contact us


close
Contact your existing broker?
exist-broker-avatar

contact-us-broker-1Smoother experience as they have all your information.

contact-us-broker-2Better understanding of your financials to provide tailored advice.

contact-us-broker-3Faster response compared to being matched with a new broker.

Contact existing broker

Loading