What are construction home loans?

What are construction home loans?

Construction home loans are a loan option that is available for the construction of a building or a property as opposed to applying for a standard home loan for the purchase of an already established property. The duration of a construction home loan can range from between six months to twelve months; this is dependent on the actual time needed to complete the construction process. It is important to talk with an experienced mortgage broker to ensure you are provided with the most suitable construction loan option available to you.

How does a construction loan work?

A construction loan works in conjunction with your approved builder and your lender. Once you have applied for and have been approved for a construction loan, it is from here where the builder can begin the construction process and then talk with your lender. The lender will calculate and make the necessary payments to your builder at various stages of the process. You will find these stages outlined in the building contract and payments are made upon the completion of these stages, the payments are also known as progress payments.

Your building contract will show a break down all of the costs involved outlining how much funds are required to complete the construction of your property. Your lender will ensure your builder will receive payment after each stage has been signed off as completed by an independent party. At the end of the construction process your home loan repayments will be based on the amount of fully drawn funds, your mortgage broker will touch base with you come this time to work out the best possible solution for your home loan after construction has been completed.

Applying for a construction loan

To go through the process of applying for a construction loan can be very much like the application process of a standard residential property purchase. Each home loan application is assessed on an individual case by case scenario whether it is for a residential property purchase or for residential construction. In some cases as with any type of loan application there can be variables that pop up out of your mortgage broker’s control that will play a contributing factor towards the overall time management.

When are the repayments made?

As with a variety of construction loans, you will only be required to pay interest each month on the amount of funds drawn at that point in time. You will make the full amount of loan repayments to the lender after the construction has been completed. However if the construction project is builder-financed, the construction loan is the builder’s responsibility and the purchaser will not need to pay any funds towards the loan until construction has been completed.

What are progress payments and when are they processed?

Once the construction process of the property has started, it is from this point when your lender will be able to start processing the progress payments upon the completed stages of construction.

Find below the breakdown of the five main stages of progress:

1.     Slab down

This stage is where the foundation of the property will be poured; this includes the preparation for levelling the ground and installation of plumbing.

2.     Framework

This stage is where the framework of the property will be erected; this includes the roofing, trusses and the installation of windows to be initiated.

3.     Lockup

This stage is where the external walls such as brickwork, windows and doors to be finalised and installed. With this stage completed this allows for the house be at a lockable stage i.e. windows fitted and finished, external doors fitted and locked with a key.

4.     Fitout or fixing

This stage is where the internal fittings and fixtures are to be completed; this includes starting or completion of any plastering, final fitment of gyprock, cupboards and bench tops for the wet areas; kitchens, laundry’s and any bathrooms/ensuites, completion of any outstanding plumbing or electrical works and finalising the interior door fit out.

5.     Completion

This stage is essentially the conclusion of the building process and also where the builder can ensure all of the finishing touches are finalised as per the building contract including general cleaning of the property prior to going through the handover process with the owner.

Will the bank finance anything outside of the building contract?

Not every bit of work carried out during the construction process can be included in the construction loan. There are some items that may need to be considered as to whether the lender will cover these costs. If you are unsure and have any questions regarding this, don’t hesitate to talk to your mortgage broker about what options are available to you as this may determine the lender choice.

Some additional costs that may need to be considered whether the lender will cover are:

·        Air conditioning

·        Floor and window coverings

·        Landscaping and retaining walls

·         Fencing

·        Swimming pools

·        Sheds and car ports

·        Driveways and pathways

If you have any questions it is important to talk to your mortgage broker about the additional items and if they will have the ability to be covered by a specific lender or whether another option will need to be found by your mortgage broker. If you are able to provide the quotes for the above items prior to the loan application process starting you may be in a position where you are able to borrow the additional funds. It is important to seek professional advice of what the lender will cover and when they will consider covering the costs as it may be something that will only be considered once the construction of the property has been completed.

Construction loans for multiple properties

If you are in a position where you wish to go through the process of a residential development the last thing you want to do is run out of funds before the completion of the finished product. It is important that you talk to a specialist mortgage broker to ensure your loan is structured correctly to ensure you will be able to reach the end goal.

Having the correct loan structure in place will allow you to have the ability to carry out a construction of more than one property at a time. As always it is important that you talk to mortgage broker about your options and the best way to achieve your long term goals.

If you have any queries or a question regarding specific information around construction loans or loans in general, don’t hesitate to get in touch with our friendly team on 08 8344 9933 or email Jessica at jessica@financeprospects.com.au to find out more to find out the options available to you.