Have you always dreamed about your ideal home?
Imagined yourself buying land in the perfect location and building a home to raise a family, retire in – or as an investment? If so, a construction home loan may be the answer to your dreams.
The objection of a construction home loan is to provide a loan for people who are building a home rather than purchasing an established property. Construction loans have a different loan structure to the standard home loans and generally has a progressive drawn down. What this means, is that you only use the money from the loan as you need it, in order to pay for the process of the construction.
The amount a lender will provide to you will be based in part on the how much the property will be valued at the end of construction. Generally, a construction loan will be interest only for the first year and then change to a standard principal and interest home loan.
So, if you’re ready to build your dream home – contact us today!
HOW DOES A CONSTRUCTION LOAN WORK?
When using a construction loan to build your home, the money is paid to you in draw downs. This ensures you’re only paying interest on the amount of the loan you are using. Once your lender has approved your loan application and the construction work has begun, the bank will make what are known as progress payments to you over the various the stages of construction.
Payments are generally made at the end of five stages:
- Once the base or slab is down: The first amount is to help with the laying of your home’s foundation. The funds cover the ground being levelled, in addition to the waterproofing and plumbing of the foundation.
- The frame has been erected: These funds are to pay for the building of your property’s frame. It allows for some of the brickwork, windows, the roof and trusses.
- Lockup stage: With this amount you can you put up the outside walls, doors and windows – to ensure your house is able to be locked.
- Fit-out: This amount will assist you in building the fittings and fixtures inside of your house. It will cover the cost of the plaster boarding, some of the installation of benches and cupboards, electricity, plumbing and the gutters.
- Completion stage: Once the property has been completed you will have a final amount to pay for any contracted items such as equipment or trade labour. You can also use it for any last-minute jobs – cleaning, plumbing and electricity being the most common final tasks.
During the process of the loan being drawn-down, the repayments and accumulated interest is only calculated on the you’ve funds used, up to each point. Note that the majority of banks will require that you spend all of your funds before you can receive the anymore.
WHAT IS THE LENDING CRITERIA OF A CONSTRUCTION LOAN?
Mortgage providers tend to be more cautious when it comes to a construction loan, as opposed to a standard home loan. There is a huge amount of trust placed in the builder you choose as the lender is providing money for something yet to be built – under the assumption it will hold a certain value on completion. There’s the possibility of things going wrong and the bank losing money. For that reason, you will often face a stringent process in order to qualify for a construction loan. These generally entail:
- You must employ a qualified builder: A qualified builder is a licensed general contractor with a solid reputation for building quality homes.
- You need to provide detailed specifications: You’ll need to provide your bank or mortgage lender with your floor plan, including every detail of the materials you be using. Generally, your builder will compile a dossier of everything he will require to complete your home.
- Appraiser estimation: By using your builder’s dossier, including all of the specifications of your intended home, an appraiser use that in conjunction with the land value and compare it to other similar houses in your intended location.
- A sizable deposit: You should expect to put down at least twenty percent for a construction loan, with some lenders requiring as much as 25%.
Providing you have a good credit rating and can meet the above criteria; as well prove your ability to make your mortgage repayments, you should be able to qualify for a construction loan.
CONSTRUCTION HOME LOAN PROS & CONS
Protection rates as one of the major advantages of choosing a construction home loan. Due to the structure of this loans, guarantees that your contractors and builders are only receiving payment for work completed, rather than before it has been finished. In addition to this benefit, is the fact it decreases the interest you need to pay because you’re only being charged interest on the amounts you actually used.
Some may view the amount of paperwork involved as one disadvantage of a construction home loan as gaining approval for this kind of loan does involve a lot of details, and a lot of communication with your chosen builder. You will also need to provide a substantially larger deposit than you would for a regular mortgage.
CONSTRUCTION LOAN INTEREST RATES AND FEES
Generally, the interest rates on construction loans will be higher than those of standard mortgage loan. It is worth noting that this high rate will usually change to a standard rate when the property has been built. Many lenders offer very competitive packages, fixed and basic loan discounts on their rates, regardless of how the loan is structured.
Contact us today to discuss the best package for your needs.
HOW TO APPLY FOR A CONSTRUCTION HOME LOAN
The process regarding approval for a construction home loan is different to what you need to do when you apply for a regular home on an established property. To stream-line your application process, you’ll need to present your bank or other lender with the professional plans of your property. This will allow for an appraiser to assess the plans and determine it’s expected market value on completion.
You will require pre-approval to be eligible for the original construction loan and then the mortgage that will supersede the construction loan once the property is established. When you meet with a construction loan expert you should expect to bring copies of:
- Any up-to-date payslips as well any other income sources (investment property income for example)
- If you have any current debt such as other loans or credit cards, you’ll need to provide copies of those
- You will need to provide a comprehensive budget indicating your monthly expenses
- Address history and employment, past and current going back at least three years.
Once you’ve chosen the land and the type of house you would like to have built, your mortgage expert can help you work out if you have been quoted a reasonable price for the construction and land costs in your area. Once that has been determined you will want to:
- Organise for an inspection of the site
- Have your ‘offer to purchase’ written up, this will be on the condition that your fixed price construction loan is approved and the results of the site inspection
- There is a ten-day time period that you will need to organise, so you may have your loan approved and inspection completed.
Once everything is in place and work is due to begin, the staged payments will be made to your contractor by the bank, as each stage of the construction has been completed. Most construction loans cover work over the period of a year and are then transferred into a standard mortgage once the property has been built.
Typically, this loan will only cover the cost of construction and not the land purchase.
FREQUENTLY ASKED QUESTIONS
How much time do I have to construct my home?
Typically, most construction loans give you up to two years to finish the construction of a new home. If you’ve purchased your vacant block of land as part of your construction loan, the time frame begins after your land purchase has settled.
Can you use a standard home loan instead of a construction loan?
This is possible on the provider you have built up a sufficient amount of equity in a standard home loan you already have established. You would need to use that equity to borrow the required amount, as the bank won’t allow you to use the house you’ve not-yet-built as security. By having sufficient equity in other loans, land or in other assets; allows you to be able to redraw money for your new construction loan. The benefit of this
is that you are able to pay for your construction expenses when they are due, rather than smaller instalments as you go. A possible negative to beginning this process from the beginning of your loan fully drawing the home loan, is that you will be paying the interest from then.
Can you choose your loan amount once construction has started?
To avoid construction delays, it’s best to stick to your loan amount once construction has started. Ideally, your builder should stick with the agreed contract and the agreed price, but if they change anything, they will need to negotiate and reassess the value of the loan. If you or your builder want changes after construction starts, a good tip is to pay for the changes yourself, if you can.
Do I need to buy a house and land package to qualify for a construction loan?
Technically you don’t need to buy a house and land package from one builder or developer to qualify for a construction loan. You may have previously purchased a vacant block of land with a regular home loan. It’s only when you sign a building contract with your licensed builder that you’ll need a construction loan. Note that by doing things this way you will end up with two separate mortgages.
What if my builder goes broke?
In Australian, all builders are required by law to have adequate insurance to cover the risk of this occurring. Should your builder does happen to go broke before your construction is complete, another builder can be appointed by the insurance company to complete the home. The insurance company will pay for any difference in costs that may arise.
READY TO WORK WITH US? CONTACT US TODAY
At Mortgage World Australia, we have the experience and expertise to quickly assess your situation and determine which lenders can approve your application. We know which loans will save you the most money and which lenders are less conservative when assessing their construction home loans.
So, contact us today to discuss how quickly we can get you building your dream home and into the property market.