A construction loan is a type of home loan designed specifically for building a house. This form of financing is different to a standard home loan. A construction loan is paid out in stages as the house is built, whereas a regular home loan is a lump sum received at settlement.
There are typically five stages of building a house with a construction loan. At each stage, your lender will finance the construction. This means that at each stage your lender will inspect the house before releasing any funds to see if the money is being used correctly and if the plan and budget is on course.
Construction loans are structured as interest-only loans during the construction period. However, when the construction of the house is completed the loan will typically revert to principal and interest repayments.
Your loan repayments will be used to fund the construction and will be given to your builder at each building stage. Stages may differ from lender to lender, but these are the common stages of building a house:
Stage 1: Foundation
Stage one includes clearing of the land or excavating if necessary. The foundation will be laid out. Your builder will also be working on the initial plumbing beneath the slab. Usually 10% of the loan will be released at this stage.
Stage 2: Framing and Brickwork
The framing of the house will be installed in stage two. This will include the internal and external framework of the house. This will also include the installation of the roof, gutters, and the insulation of the walls. About 15% of the loan will be released at this stage.
Stage 3: Lock up
Once stage two is completed, it’s time for your builders to add the windows and doors, hence the term ‘lock up’. It’s also safe for your tradies, plumbers and electricians to start working on your house. About 35% of the loan will be released at this stage.
Stage 4: Second Fix
This stage involves installing the fittings in the kitchen, bathroom, and other rooms in the house. The plumbing and electrical works should be completed at this stage. The interior of your house is starting to look like a home. About 20% of the loan will be released at this stage.
Stage 5: Completion
The last stage is where the work is finally completed. The house only needs minor fixing and cleaning up. This is also the stage where you pay the final 15% of the loan.
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