Construction loans, sometimes referred to as construction home loans, offer an exciting opportunity for Australians eager to build a home. These loans differ from your standard home loan, as they’re primarily geared towards funding a new construction process, which involves several stages of the construction. When opting for a construction loan or even comparing construction loan rates with a traditional home loan, factors such as the loan interest rates, the loan amount, and the specific type of home loan designed for building projects are crucial. It’s also worth noting that unlike regular home loans, you don’t get the whole loan amount upfront.
Table of Contents
- What is a Construction Loan?
- What is an Owner Builder Construction Home Loan?
- How do Construction Loans Work in Australia?
- When to Apply for a Construction Loan?
- How Do Progressive Payments Work?
- What are the Benefits of Construction Loans in Australia?
- What are the Risks of a Construction Loan?
- How to Get a Construction Loan in Australia?
- What are the Requirements for a Construction Loan?
- Which Documents are Required for a Construction Loan?
- Understanding Loan Interest Rates in Australian Construction Loans
- Constructions Loan FAQs
- 1. What per cent do you have to put down for a construction loan?
- 2. What is the average interest rate on a construction loan?
- 3. How do banks value construction loans?
- 4. Is it harder to get a construction loan than a mortgage?
- 5. How long does a construction loan take to approve?
- 6. Do you make monthly payments on a construction loan?
- 7. Can a first-home buyer get a construction loan?
- 8. Can you refinance a construction loan?
- 9. How soon can you refinance a construction loan?
- Get Your Construction Loan with The Home Loan Specialists at Zanda Wealth Mortgage Brokers
What is a Construction Loan?
A construction loan, specifically a construction home loan, is a unique type of home loan designed for those embarking on the journey to build a home or undergoing major renovations rather than buying an existing home. This kind of loan works differently from a mortgage used to buy an existing home. Instead of borrowing the whole loan amount at once, the home builder or renovator can draw down their loan amount at various stages of construction, essentially paying interest only on the amount they’ve drawn down. This way, you only pay interest on what you’ve spent, which could offer a much-needed financial relief during the construction phase.
What is an Owner Builder Construction Home Loan?
Owner-builder loans are for those adventurous souls who choose to build their own home from scratch. Before diving into the building process, proper building plans must be submitted to the local council, and relevant permits, such as DA and CC, obtained. However, getting a construction loan, especially an owner-builder loan, can be tricky. Therefore, we recommend working closely with home loan specialists, such as Mortgage Providers’ construction loan specialist.
How do Construction Loans Work in Australia?
In the realm of home loans, understanding how construction loans work is vital. Unlike a traditional home loan where the loan amount is received as a lump sum, construction loans are tailored to match the building contract and construction process. They are broken down to accommodate the specific needs and stages of the construction process. Thus, instead of a lump sum, the loan amount is released in stages, ensuring that the borrower pays interest only during the construction period or until construction is complete.
When to Apply for a Construction Loan?
Construction loans are available for both residential and personal investment purposes. Once you’ve met all the conditional requirements of obtaining a fixed-price contract from a licenced builder and received land registration and council approval of your building plan, you are ready to apply for your loan.
How Do Progressive Payments Work?
Lenders will make progressive payments throughout the various stages of construction once you have the approval for your construction home loan and construction has begun. These payments are usually made directly to the builder after each stage of the construction. The five stages of construction that will determine your progressive payments are as follows:
- Slab Down / Base Stage
The slab or base stage is the first stage of the building process. The concrete slab that will serve as your home’s foundation is measured and poured here. Builders will connect the plumbing and drains after the slab has had time to cure.
Funds required: Approximately 15-20%
- Frame Stage
During the frame stage, the builder will now concentrate on erecting the skeleton of your home after they have laid the slab. This will take about one day for a typical single-story home and two to five days for a two-story house.
Funds required: Approximately 20%
- Lock-up Stage
The exterior of your home begins to take shape during the lock-up stage. As the name suggests, it entails erecting the external walls, doors, roofing, windows, and other components that will allow you to ‘lock up’ your property.
Funds required: Approximately 20%
- Fit-out / Roof Stage
The builder will be able to install internal fittings and fixtures, such as lights and plumbing, now that your home has been properly secured. During the fit-out stage, they will also start working on things like benchtops and cabinets.
Funds required: Approximately 30%
- Completion Stage
The last fix will involve painting and detailing as well as tying up any remaining loose ends concerning plumbing and electricity. During the completion stage, the contractors will clean up the site, leaving the building and its surroundings in good condition.
Funds required: Approximately 10%
What are the Benefits of Construction Loans in Australia?
Construction loans are an important part of the Australian real estate market. They provide several advantages to both property developers and home buyers. Construction loans in Australia have many important benefits, such as:
Reduced Interest Payments
The interest you pay only applies to the amount you borrow, not the entire loan. For example, if you have only drawn down $250,000 on a $450,000 loan by the third progress payment, you will only be charged interest on the amount drawn down, not the additional $200,000.
Financial Protection
A construction home loan allows for the controlled release of funds for the corresponding construction phase. This ensures you only borrow what you need and stay within your construction budget.
Additional Payments
Lenders generally allow additional payments into your construction loan, enabling you to reduce your balance and pay less interest.
Available for Individuals & Businesses
Construction loans are available to both individuals and businesses.
Helps Reduce Taxes
Construction loans are tax-deductible expenses, which can help to reduce your tax bill.
What are the Risks of a Construction Loan?
When it comes to Construction Loans in Australia, there are a few things for borrowers to be aware of before taking out the loan.
Availability of Funds
There may be unforeseen expenses that you will need to fix with additional capital expenditures. If you have a limited budget for these, it may be challenging to request early withdrawals from your progressive payment plan, resulting in a construction halt.
Overestimated Property Worth
One of the most significant risks of obtaining a construction finance loan is that the property may not be worth as much as you anticipated when completed. This can happen if the market falls while you are still building or if you overestimate the property’s value.
Building Delays
Work completed will usually need to be assessed before payment is released, causing delays and frustration.
Additional Requirements
Because of the increased complexity of a home loan, the time between applying for the loan and being approved for the loan may be lengthy. This period will also feature back-and-forth between you, the builder, and the lender.
How to Get a Construction Loan in Australia?
A construction loan differs from a traditional home loan because you need additional documents and approvals before a loan is granted.
Documents typically required by lenders include:
- Various council permits and plans.
- A copy of your fixed-price construction contract.
- Any insurance documentation.
You will be required to provide details of your income and expenses, similar to a home loan, to satisfy your lender’s standard lending requirements.
Following that, a property appraiser will typically evaluate your construction plans in order to estimate the expected value of the dwelling. This is to provide the lender with detailed information on the property’s value after construction is completed. This will be taken into account when approving the loan. During construction, additional property assessments and inspections may be required.
If your loan is approved, you will receive a loan offer. Then, as with other home loans, a deposit is required – the minimum is 5%. If your deposit is less than 20%, you must apply for a lender’s mortgage insurance.
During the construction process, you must confirm that work has been completed at each build stage. In some cases, you may need to provide an invoice for the cost of the work completed.
What are the Requirements for a Construction Loan?
You should apply for a construction loan if you want to build a new house. This loan is designed specifically for people who are building a new home. However, you should know a few things about construction loans before applying.
To be eligible for a construction loan, you must meet the following criteria:
- You must be an Australian permanent resident or citizen.
- You must have a good credit history.
- You must have at least 20% of the project’s total cost.
- You must show proof of your income and assets.
- You’ll need a detailed construction plan as well as a timetable. The bank will want to know how long the construction process will take and where you are in the process.
Which Documents are Required for a Construction Loan?
If you’ve hired a registered builder to finish the job, you may be required to provide the following documents:
- A signed copy of the Industry Standard Fixed Price Contract
- Copies of building plans and council permits
- A copy of the builder’s license
- Bank account information for the builder
- Copies of insurance policies such as Builders All Risk/Public Liability Insurance, Domestic/Home Warranty Insurance, and Public Liability Insurance
If, on the other hand, you’ve decided to build your own new home, you should have the following documents ready:
- Copies of construction plans and permits
- A copy of the Quantity Surveyor’s report outlining the anticipated costs
- A detailed breakdown of construction costs
- Detailed timetable
- Copies of all estimates, bills, and quotations
- Copy of soil test results and comments from the Quantity Surveyor
Understanding Loan Interest Rates in Australian Construction Loans
Navigating the intricacies of Australian construction loans can seem daunting, especially when it comes to comprehending the loan interest rates associated with them. These rates play a pivotal role in determining the overall cost of borrowing for a construction project. To make an informed decision, it’s crucial to understand how these interest rates are calculated, their impact on your monthly repayments, and the factors that influence their fluctuations in the Australian market. This knowledge can empower you to select the most cost-effective loan option for your construction endeavours.
Constructions Loan FAQs
1. What per cent do you have to put down for a construction loan?
The minimum is 5%, and if your deposit is less than 20%, you must apply for a lender’s mortgage insurance.
2. What is the average interest rate on a construction loan?
Average construction loans are around 2.5 – 5%, which is typically higher than traditional home loans.
3. How do banks value construction loans?
Bank’s value a construction loan on either the completion value or the land price plus construction value – generally, whichever is lower.
4. Is it harder to get a construction loan than a mortgage?
Yes, obtaining a construction loan is usually more complicated. This is because you need to submit more documents and permits.
5. How long does a construction loan take to approve?
Since council permits could take 1 – 4 months to be approved, construction loans could take up to 6 months.
6. Do you make monthly payments on a construction loan?
Before construction is complete, you only make interest repayments. Once the building is complete, you will begin to pay monthly loan repayments like a traditional home loan.
7. Can a first-home buyer get a construction loan?
Yes, first-time home buyers can obtain a construction loan, but there may be some complications. For example, you may want to bring in a licensed builder because attempting to DIY may raise red flags with your lender. Banks may also want to see that you have some money set aside in case the project goes over budget.
If you don’t have a 20% deposit, you’ll have to pay for the lender’s mortgage insurance, which protects your lender (not you) if you fall behind on your payments. Alternatively, ensure that you have good relations with a family member who could serve as a guarantor. With government assistance, including Canberra’s 5% deposit scheme, you could finally take the first step toward home ownership.
8. Can you refinance a construction loan?
Refinancing a construction loan mid-construction can be complex and may be impractical. However, as soon as construction is complete, your loan reverts to a typical home loan.
9. How soon can you refinance a construction loan?
Your lender or broker will conduct a review at the end of construction, and you can look at refinancing your regular home loan then. Chances are that your renovation has added significant value to your home, giving you some equity to play with.
Get Your Construction Loan with The Home Loan Specialists at Zanda Wealth Mortgage Brokers
Our team at Zanda Wealth Mortgage Brokers is here to help you get a construction loan to build or renovate your dream home. With the help of our team, you’ll be able to protect your finances and get reduced interest rates on your home construction project. Contact us today for an assessment of your construction project and everything required to get set up and start the building process.
