What is a Construction Loan?

We are here to help you and guide you through the process

Building your first home, or building for the first time can be a confusing and daunting process for many people. I thought I would outline in this blog a few points that I am often asked by clients.

How is a Construction Loan different from a "Normal Loan"

Building works call for a steady "drip feed" of funds to meet ongoing costs as construction work progresses.  Unlike a traditional mortgage where the funds are made available to borrowers in a single lump sum, a construction loan lets you draw on the loan balance when payments need to be made to your builder at key stages. These payments are known as progress payments.

What repayments will need to be made during construction

While work is still progressing you will only be asked to make interest repayments on the money that has been drawn down.  So at the start of your loan you can expect small repayments, and these will gradually increase as your building project nears completion.

This means that you aren't paying interest on money you have not used as you would with a traditional home loan, and with a construction loan the repayments will be far lower until your project is complete.

What deposit is needed

Construction loans normally have a variable rate and in general you can expect a maximum Loan to Valuation ratio ("LVR" - the maximum proportion of the property's value you can borrow) of 95% which means you will need genuine savings of a minimum of 5% of your loan amount.

If you are considering building this is something worth speaking to us about as the situation varies widely between lenders.

Give your Mortgage Choice broker servicing the NSW Hunter Valley region, Lauren Murphy a on 0408 480 562 for more information, remember we are here for you.



Posted in: Home loans

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