A construction loan is designed to finance the building of a home or a major renovation. It works a bit differently from a regular mortgage because of the loan structure. Construction loans are paid in stages while a regular mortgage is paid in full at settlement.
Construction loans have progress payments, which means your lender makes a payment at each stage of construction. Usually, there are five stages:
1. Slab down: Laying the foundation of your property.
2. Frame up: Building the frame of your property, this covers roofing, windows, and brickwork.
3. Lock-up: Installing the windows and doors.
4. Fixing: Installing the internal fittings and fixtures such as plumbing, electricity, cupboards and gutters.
5. Practical completion: When builders add finishing touches and do the overall cleaning of the property.
Funds for construction are released directly to the builder at each stage. Before you apply for a construction loan, here are the top 4 things you should consider:
1. Construction loan interest rate
Before signing up for a loan, shop around for a competitive interest rate and a package that can suit your needs. loans.com.au offers interest-only repayment terms during the construction period. This means you only need to pay the interest on the loan and not pay back any principal during this period. You can check out more of the features here.
2. Construction loan documents
Your lender will ask for the necessary documents before proceeding to construction. Usually, you will need to provide supporting documents such as a contract of sale or proof that you own the land, a fixed-price building contract from a registered builder, evidence that you have a deposit, a detailed plan for construction, and a permit to build from the local council.
3. Upfront costs
Like a regular mortgage, there are costs involved when you build a house. These include:
•Stamp duty: This is a tax on the sale of the property. This will vary depending on your location and the value of the property.
• Lender’s Mortgage Insurance: This is applicable if you have less than 20% deposit. LMI is designed to protect the lender in the event you can no longer afford the repayments.
• Valuation: A valuation fee will be payable at each stage of construction. Your lender will want to know if sufficient progress is being made.
4. Select a designer or builder
Not all builders are created equal, so it pays to get some recommendations from trusted family and friends. Check for builders that have the right experience to construct your home. If they only have experience in house extensions then they might not be the right choice. Make sure that they are registered and insured, you can do this by asking the Housing Industry of Australia or the Master Builders of Australia if they are listed. You can also get information from your state or territory government's Department of Fair Trading or Consumer Affairs.