Knowing your limits before beginning the construction process is crucial.
Available to those building new homes or undergoing renovations on a home, construction loans differ from home or commercial loans in that a portion of your loan funds are released at each stage of the construction journey; as opposed to being received in one lump sum. In short, a construction home loan covers the expenses you incur as you build your own home.
Knowing your limits before beginning the construction process is crucial. This is so you can adequately plan your construction, and because you cannot top up your loan until your house is complete. We can help you determine how much you can borrow so that you can begin planning for the future.
How much deposit do I need for a construction loan?
Construction loans do have a minimum deposit at some lenders. To secure a construction loan, you’ll have to put down at least 20% of the estimated value of the property. However, like ordinary home loans you are able to borrow more than 80% of the value of the construction loan, you will just incur lenders mortgage insurance (LMI) in this instance.
Is it difficult to get a construction loan?
There is no reason why a construction loan should be any more difficult than a normal home loan. However, it helps to have all of your ducks in a row before applying, so that you don’t encounter unnecessary hurdles – this is where it pays to have an experienced mortgage broker in your corner.
What are the qualifications for a construction loan?
To qualify for a construction loan, you must provide detailed income information and your financial verification documents, just like any ordinary application. In addition, you’ll need papers detailing the plans for construction. This could include:
- Council-approved plans and specs (or, if not yet approved, a copy of those plans which have will be submitted to the Council)
- A signed and dated building contract which includes the building stages and schedule of payments
- Variations and/or quotes
- Quantity Surveyor Report for building contracts under $1 million
- Builders Risk Insurance
- Your builder’s Public Liability Insurance
Applying for a construction loan can be time consuming due to the amount of paperwork and information you need to provide. That’s where we come in. Our mortgage brokers can streamline the application process, make it easier for you to gather all the necessary information, and ensure a quick turnaround time from application approval to funding.
Can I use my land as a deposit for a construction loan?
The answer is yes. If you own the land, that equity can be used as your deposit.
Construction loan interest rates
A positive for construction loans is that you generally pay less interest. Why? Because you only pay interest on the amount drawn down as opposed to the fully approved loan amount (i.e. you pay interest on the portion of the loan that is drawn down periodically). Many find this a huge benefit as it saves them money during the construction period, when funds might be a little tighter.
What are progress payments?
This is how construction loans are funded. Progress payments cover the costs for each stage of building your home and are sent to your builder after each individual stage has been completed. Most lenders will require the builders invoice for the stage completed (which must match to the building contract provided), and your approval before making payment directly to the builder on your behalf.