Residential construction loan

Welcome to our Residential construction loan information page: This page is designed to assist you in understanding the basics of this type of loan and to give you an understanding of some of the features and downsides.

About Our services:

  • Our brokers are experts in obtaining home loan approvals and specifically trained in loan structuring and credit policy, ensuring the best possible outcome for your needs.
  • We provide an Australia wide service, at no cost to you.The lenders pay us a commission for the introduction of your business.
  • Our website is designed to help borrowers understand the differences between loan types and the importance of having a mortgage broker to assist you in finding the right lender.
About Residential Construction Home Loans:

What is a construction loan?

A construction loan offered by lenders to assist clients who are wanting to build a new home or renovating an existing property. The loan is funded by five separate payments usually called progress payments or drawdown payments.

The loan is designed to be paid to the builder as they complete five critical stages of the building works.

As each of the five stages is finished, the builder will invoice the owner.

The owner will pass the invoice on to the lender.

The lender will have the site inspected, and if the work is deemed satisfactory, they then pay the builder for the work completed so far.

What is the process for getting a construction loan?

To understand the process, let’s use an example:

We will use a figure that assumes that there is already a loan on the land, and add the home construction costs.

Assuming the land already has a loan amount on it of $100,000.

Assuming the total construction costs will amount to $400,000.

Total bank loan required, once construction work is completed, is $500,000.

So in this example our client is starting with a debt of $100,000 on the land. They will only make payments on the $100,000 until construction starts. Once construction commences, and as each stage of construction is completed, the lender will release each of the progress payments to the builder. These progress payments are added to your loan balance at the time of each payment.

An example of the process:

  • The concrete slab for the home has been completed – invoice one is issued for $80,000. Our client’s loan balance is now $180,000 owing.
  • Frames and trusses are erected – invoice two is issued for a further $80,000. Our client’s loan balance is now $260,000 owing.
  • Brickwork and tiles completed – invoice three is issued for a further $80,000. Our client’s loan balance is now $340,000 owing.
  • Internal works are completed the lock-up stage – invoice four is issued for a further $80,000. Our client’s loan balance is now $420,000.
  • Completion of the home is finalised – invoice five is issued for a further $80,000. Our client’s loan balance is now $500,000.
  • NOTE: Once the construction work has been completed, we generally need to re-apply with the same lender for a different loan. The reason for this is that construction loans are rarely the best loan that the bank would have to offer you and why wouldn’t you want a better loan facility? Depending on your financial situation, if you are paying rent while you were building your home, we may have applied for an interest only loan, to make life a little bit easier while you were paying rent and mortgage payments at the same time. This obviously needs to be changed to a better loan structure as soon as possible.

This all part of what we do for our client’s when they have a construction loan.

Please speak with your broker to find out more about a construction loan and the lending policies and terms and conditions that form part of your obligations under a Construction Loan Contract.

What are the pros and cons of construction loans in Australia?

What benefits are there for you in a Construction Loan?

The pros:
  • The obvious benefit to a construction loan is that you can start building a new home or start renovations on an existing property.
  • The bank is in control of the payments, meaning that the builder has to have the work approved before receiving payment. This offers some comfort in the knowledge that an authorised inspector will be looking at the property at each stage of construction during the progress payment periods.
  • Because the builder understands the nature of the lending and progress payment structure, they will always accept the terms regarding the progress payment process that the lender imposes. This means that it’s a pay-as-you-go system for you, in that you do not have to put down a bigger lump sum with the builder, such as 50% of the building costs or more, before the builder actually starts building your home. This gives you the security of knowing that the work will be done and inspected properly at each stage.
  • If you have applied for a Construction Loan in order to fund renovations, then you will be able to commence building immediately once it is approved. This is a much better option than saving up the cash over the next 10 years to pay for the construction. This allows you to finish your home and live in it sooner and actually be able to enjoy your home, in its completed form, while you are paying your loan down.
  • Interest only payments are available for most Construction Loans. This is an important feature when considering a Construction Loan. The majority of our clients will be paying rent in one form or another while they are going through the process of building their home. In order to ease the financial stress of repaying a home loan and rent at the same time, this is one essential feature that we can build in to the new loan to keep the cost down until construction is completed.

What do you need to be careful of in a Residential Construction Loan?

The cons:

The loan must be set up with as many safeguards as possible, to reduce the chances of you not being able to make the loan repayments as the construction is progressing. Your mortgage broker will have a checklist of benefits, features and options that they would like to see in your loan and that is exactly what they will be focusing on, when they assess who will be the most suitable lender for your construction lending needs.

You also need to be sure that you understand the lending process that is involved when you apply for a construction loan.

  • Not enough money available? Include all costs so they can be factored into your loan, so that you do not have a shortfall. As you are probably aware, there are more fees and charges payable, when you decide to build a home, than there would be if you just purchased an existing property.
  • Costs such as land inspections and land preparation, architectural costs, council approval and finishing touches to the property such as fences, driveways and landscaping to name a few. It is important to factor in as many of these costs as you can before applying for the finance.
  • To increase your loan again because you underestimated the associated costs, is more than likely going to attract an further fees and the need to submit a new loan application.
  • It is critical that you apply for the correct construction loan. Obviously your broker, here at Illawarra Mortgage Brokers, will guide you and let you know what options are available.

Why it is important to have the right loan from the beginning.

  • The loan in most cases is going to start off as an interest only facility in order to reduce the payments on the loan as it scales up during the progressive payment process.
  • Because there are so many lenders with hundreds of loans available, there is definitely an advantage in being able to choose the most cost-effective loan.
  • In addition to this, we need the lender to be in a position to convert the loan over to a different product at the end of construction.
  • Why? – Residential construction loans are not typically discounted during the draw-down process. It would be an expensive mistake for you to have a loan that is going to remain on a higher rate after your construction is finished.
  • You will have the option of converting to a cheaper loan that the bank should have available.

Your mortgage broker is going to investigate the construction loans available for your particular circumstances. They will also investigate what is available from the same lender, to convert to, after construction is finished. Just how competitive that converted loan will be, is important to know before you sign up with the lender.

Don’t forget that your residential construction loan will only exist for a short time, say one year, but you will be paying the ongoing loan for a further 25 years or more. It is therefore very important that you understand that you’re ongoing loan is more important than the construction loan.

In a nutshell, we just need to know that the lender has the correct loans available for both loan stages, during construction and after construction.

Contact a Mortgage Broker on (02) 4257 5626 to discuss your options or fill out our online enquiry form. You can find out what your options are in a matter of moments.

How can I apply?

These are your simple steps to apply for a loan.
  • Contact us on the numbers above to speak to a mortgage broker, or complete our online enquiry form.
  • You will speak with a broker who will take into account your needs by discussing not only your requirements, but also any concerns you have, and offer you some possible strategies and ideas that you may not have thought about.
  • Once we know what you require, we will draft and email you a proposal– this will usually consist of a few options that are easy to understand.
  • Once you have had a chance to look at what options are available, you can contact your broker or the broker will call you, to discuss the proposal.
  • You can then decide if you wish to proceed or you may just want to discuss more options.

What are my other options?

There are many options available:
  • Whether you are after a variable interest rate, a fixed interest rate, interest only loan, equity loan or any of the other loans available, it is important that you find out what is available to you before applying for a loan.
  • The loans listed below are available for most lending purposes. Whether you are refinancing your home loan to a lower rate, or a property investor looking to buy that second or third property, we will have some ideas for you to consider.
  • Even if you are a first home buyer purchasing a new home or renovating your existing home, there are some great deals available from the banks and lenders that we are accredited with.
  • Please click on a link below to learn more about other loans that are available to you.
Summary:

NOTE: These pages are of general advice in nature. They have not taken into account your specific needs and objectives and are therefore designed to provide general information only. Before acting on any of the information contained on our website please have your Mortgage Broker assist you in determining the right product for your individual needs.

Posted 20 February 2015
Copyright © 2015 Illawarra Mortgage Brokers.

Specializing in Residential and investment lending.

Mortgage finance brokers located in the Wollongong, Corrimal, and Kiama and Shellharbour areas.

Lending Australia wide

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0242 575 626

Illawarra Mortgage Brokers

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Illawarra Mortgage Brokers