Most lenders offer construction loans. The loan itself is generally one of the lenders standard lending products, however, it is the processes surrounding the loan that make ‘construction loans’ somewhat different.
Before a lender will fully approve a construction loan, they will generally require the following:
- Development Application (DA) Approval
- Fixed Price Building Contract
- Copy of the Builders Insurance
- Construction Certificate
- Copy of the Council Approved Plans
- Copy of tender
- Progress payment schedule
As a general rule, it will take a minimum of 4-6 months to obtain the documents above. (ie. from the time you initiate things with a builder to the time you have the documents through Council etc). Having said that, it is more likely to take 6-12 months.
During the construction period, most lenders will only require Interest Only type repayments. At the completion of the construction period, the repayments will generally revert to Principal & Interest type repayments. The exception to this would be where you are constructing for investment purposes. In this case, you may wish to continue with Interest Only payments.
If you have a ‘land loan’ you can generally combine this with the construction loan at the completion of the construction of your property. However, it is not mandatory to do this and if the land loan is a fixed rate loan product, you may incur significant penalty to combine the two.
You should also be aware that many lenders will charge ‘progress payment fees’ along the way (ie. a fee each time they make a progress payment to the builder). There are normally five progress payments and the fee could be anywhere between $25 to $50 per progress payment.
The lender will release funds to the builder in accordance with the progress payment schedule. As an example, the first payment may be upon completion of the slab, the second once the framework is up, etc, etc. This of course is dependant upon the progress payment schedule laid down in the contract by the builder.