May 15, 2015
With so much activity happening within the Gold Coast property market, now may be an ideal time for you to build that house you’ve been dreaming about for years. There is plenty of opportunity to snap up that perfect block of land with lots of new land releases in our area.
Applying for a loan to build your house is slightly different to a standard loan. The loan itself is structured differently.
A construction loan is different to a regular home loan in that the funds are drawn down in increments as the dwelling is built rather than in one lump sum. Generally you have about 12 months to completely draw down the loan.
The loan is also different in the following ways:
1. Required Documentation
The lender will need to verify the construction before approving the loan and will need to assess the following documents before they issue approval:
- A copy of a fixed price building contract with details of all the building specifications, variations, allowances and costs.
- A copy of the house plans. These can be non approved plans when applying for your loan, but all plans will need to be approved by the local Council or a Building Certifier before drawdowns on the loan commence.
- Proof that the construction of your home is being carried out or supervised by a registered and insured builder who guarantees the work, takes full responsibility for the construction and operates in accordance with all required legislation.
- Documents showing insurance for builders risk has been taken out.
2. Progress Payments
As mentioned above, construction loans are not drawn down as one lump sum but rather drawn down in stages as progress payments. The progress payments are generally in line with the following stages of construction:
- Slab or base
- Fit out
- Final or completion
When each stage is reached the builder will submit an invoice that you pass on to the lender along with a completed Loan Disbursement Authority and the lender releases the funds for that stage.
Taking out a construction loan instead of a standard loan may incur the following extra fees:
- Inspection fees - The lender may carry out inspections on the build before releasing the progress payment. This is to ensure the lender is satisfied the work is being carried out at an acceptable rate and standard. These inspections often incur inspection fees.
- Drawdown fees - Depending on the lender, you may be charged a drawdown fee at each drawdown to cover the costs associated with those drawdowns. Alternatively you may be charged at the beginning of the loan with a one-off construction fee instead.
During 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 standard 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 allow additional repayments during the construction period.
It’s important to make sure your builder holds full insurance cover over your home whilst it is under construction as most insurance companies will not provide full comprehensive cover on a property while it’s under construction. Builders insurance however will cover not only the build but also any construction related incidences that may occur such as non-completion, structural defects and public liability.
Builders insurance covers you up until handover. So when construction is finished and the builder hands you the keys to your new home, you will need to make sure you take out your own insurance.
6. Unexpected Costs
While all costs associated with the build should be fixed in the building contract, there is always the potential that you may incur extra costs associated with the build or the total cost may even be under the expected amount. It is always good to check your loan to determine if it’s possible to vary the loan amount if the construction costs vary.
7. Final Documents
Before the final payment is made for your construction loan the lender will request the follow things:
- A final valuation on the property
- A Certificate of Occupation or Survey Certificate
- The final invoice from the builder
- Documentation showing you have taken out insurance on your home and the lender is noted as Mortgagee.
It can be slightly confusing for those who haven’t gone through the process before, but don’t worry we will go through it with you and be there to help you along the way. If you are ready to get started in building the home of your dreams or you want more information about construction loans, give us a call on 1300 730 858