What is a construction loan?
Construction loans allow for a new homes to be built through the duration of construction. They normally range from between six to twelve months dependant of the time needed to build your home. Once you have locked in a construction loan, it is after this time where the chosen lender will make the necessary payments to your builder at different stages. These stages are outlined in the build process contract and payments are made as these stages are completed otherwise known as progress payments. At the end of the construction process your loan repayments will begin as normal based on the full amount of funds that are drawn.
How do construction loans work?
Your chosen builder/building company will outline in a building contract how much money is required to complete the build of your home. This document breaks down the costs involved into the relevant stages of work. The chosen lender providing the finance will ensure your builder receives payment after each interval is completed usually as per each month. The payments will be paid to the builder once the lender has independently verified that the specific stage of work has been completed and meets the criteria.
When do you pay?
With many construction loans, you will only be required to pay interest on the amount of money that is drawn out each month. You will begin to make the loan repayments to the lender for the full amount after your home is completed. If the project is builder-financed, the construction loan is the builder’s responsibility and the buyer will not need to pay anything at all until the end of construction, based on the full amount of funds drawn.
What are progress payments?
Once the construction loan has been applied for and then been approved, the construction process of the property is then started and from this point on is when your chosen lender will be able to start making progress payments throughout the completed stages of construction.
In many cases the payments will be made by the lender upon completion of the below stages:
- Slab down: This stage allows for the foundation to be poured for your property, including the preparation stages for levelling the ground and plumbing.
- Framework: This stage allows for the framework of the property to be erected, including the roofing, trusses and windows to be initiated.
- Lockup: This stage allows for the external brickwork/walls, doors and windows to be installed allowing the house be at a lockable stage i.e. windows fitted and finished, external doors fitted and finished.
- Fitout or fixing: This stage allows for the internal fittings and fixtures to be completed, including plastering/gyprock, cupboards and benches for the areas such as kitchen, laundry and bathrooms, plumbing, electricity and completing the interior door fit out.
- Completion: This stage covers off on the conclusion of the building process and ensuring all the finishing touches are finalised as per the building contract including general cleaning of the property.
Will the bank finance other work to the house done by other suppliers?
Not everything is able to be included in the construction loan, some of the additional items that may need to be considered as to whether the lender will cover these costs are:
- Air conditioning
- Floor and window coverings
- Landscaping and retaining walls
- Swimming pools
If in doubt it is worth talking with your mortgage broker about the additional items and if they will have the ability to be covered by a specific lender. If quotes for the above items are provided prior to the loan application you may be entitled to borrow the additional funds, but keep in mind it is important to seek advice of what the lender will cover and when they will consider covering the costs as it may be something the will only be considered once they main house has been completed.
Constructions loans for more than one house at the same time
If you are wanting to carry out a residential development the last thing you want to do is run out of funds before construction is complete, it is important that your loan is structured in a way that supports your needs and will see you to reach the end goal. This will allow you to have the ability to carry out a construction of more than one property at a given time. It is important that you talk to a broker about your borrowing capacity and ensure that you will have the correct structure in place to be able to achieve the end result of completing a development.
How long does it take to apply for a construction loan?
The application process for a construction loan is very much along the same lines of a residential home loan for a purchase loan. Each application process is assessed individually on a case by case scenario whether it is for residential home purchase or residential construction and in some cases there can be variables that pop up that will play toward the contributing factor of time management. Don’t hesitate to talk to your mortgage broker to find out the process and the steps involved.
If you have any queries or a question regarding specific information around construction loans or loans in general, click here to talk to your mortgage broker Gerry and he will be able to assist with answering any questions.