Blog Construction loans – how do they work

Construction loans – how do they work

30 May 2016
Construction loans – how do they work

Not all loans are the same.
If you are buying established property then it’s a fairly straightforward procedure. You save a deposit and then a lender will provide the money for your purchase. When you have the keys to your new property in your hands you start paying back the loan on a principal and interest or interest-only basis.
But what if you are building a new home, or carrying out extensive renovations?
The valuation of the property will be much lower at the start than when it’s completed, so you don’t have the collateral to borrow the full amount immediately.
Luckily, when making the decision to build as opposed to buying an established property, you can also make the decision to opt for a different loan structure.

How construction loans work?

A construction loan is designed to assist people who are building from scratch. It allows progressive drawdowns. It will typically be interest-only during the building stage then revert to a standard principal and interest loan upon completion, and the amount available to borrow will be in part based on the value of the property upon completion of the construction.
The construction loan is a great way to help people build their dream home.
Of course there’s a lot to do before a single clod of dirt is turned over. To get a construction loan you must own, or be in the process of acquiring, land and have a signed building contract.
The building contract needs to be a fixed price contract so the cost of each building stage is pre-determined. This ensures no hidden costs are incurred during the construction process that could complicate the finance arrangements. 
We will make progress payments on your behalf throughout five specific stages of construction.
Generally the payments will be made at slab down, frame complete, lock-up, fitout/fixing, and completion.
As the loan is being progressively drawn down interest and repayments will only be calculated on the funds used. For example if by the third progressive payment only $150,000 has been drawn down on a $300,000 loan, interest would only be charged on $150,000.
The funds are paid directly to your builder. A progress inspection will be carried out by an independent valuer for each building stage, and once completed the builder will send us an invoice. They will be paid within five business days.
The construction loan offers one of the most competitive interest rates on the market, and you can borrow up to 90 percent of the value of your new property.
And once construction is complete your loan will be converted to our offset variable home loan, which has a range of great features such as zero monthly or annual fees, fixed options, 100 percent redraw offset facility and a Visa Debit card linked to the account.
Call us today to discuss building your dream home.