We are seeing a marked increase in construction loan applications at the moment. This is due to the shortage of houses for sale on the market which has led our clients to increasingly look at spending their money on increasing the value of their home through major renovations or doing a knock-down and rebuild.
A construction loan is used to finance the construction of houses. Under this type of loan, the funds are drawn down as the house is built rather than in one lump sum. Usually the lender sets a time limit on the draw down period, generally you have about 12 months to completely draw down the loan.
The maximum Loan to Valuation Ratio is usually 95% depending on the lender. Generally the lender will require that any customer contribution is utilised before the loan funds are drawn.
The following documentation must be obtained and verified before a construction loan can be assessed:
• Tender or copy of a fixed price building contract detailing all of the building specifications, variations, allowances and costs.
• Copy of the plans of the new property that have been approved by the Local Council or Building Surveyor. The plans will generally not have to be approved at the time of application, but they must be approved before drawdown.
• Evidence that construction is being undertaken or supervised by a registered and insured builder who takes full responsibility for the construction and is able to provide appropriate guarantees as required by the various state legislatures.
• Details of insurance for builders risk.
How construction loans work
Unlike regular home loans where you typically receive a lump sum of the loan amount at settlement, construction loans are paid out at designated intervals from the lender so that the builder can receive funds to continue with the different stages of construction. These drawdowns are sometimes referred to as progress payments.
The progress payments are generally in line with the following stages of construction:
- Slab or base
- Fit out
- Final Completion
At each stage, borrowers must provide the lender with a completed Loan Disbursement Authority and a builder’s invoice. The lender may carry out an inspection at the end of each stage to check that the work has been done to an acceptable standard before releasing the next payment to the builder.
Fees & Repayments
FEES: Lenders often charge two fees associated with each drawdown (lenders may charge a one-off construction fee to cover both of these)
- Inspection fee. This is a fee which is applied each time an inspection is made for each progress payment. This fee is usually between $150-$200
- Drawdown fee: Some lenders charge this to cover the costs of making the money available to the borrower.
During the construction of your home, the loan repayments required generally only cover the interest costs, and interest is usually only calculated on the amount that has been actually drawn down, not the total approved amount.
Once your home is complete and the full amount of the loan has been drawn down, your loan will convert to a standard home loan and your repayments will cover both the principal and interest component of your loan.
This is not to say that you cannot pay principal and interest payments while your home is being constructed, as most lenders will still allow additional repayments during the construction period.
Before the final payment is made the lender usually requires a final valuation. In addition, the following documents must be obtained and verified.
- A Certificate of Occupancy or Survey Certificate,
- A builder’s final invoice
- A comprehensive building insurance policy with the lender noted as Mortgagee.
If you are considering getting a construction loan get expert advice at no cost to you, just ‘Ask Andrew’ by completing the contact form at the top right of this page or call on 9401 9244 or 0412 498 872.