What is a Construction Loan?
A Construction Loan* is a regular home loan that has some restrictive operational conditions which apply to the loan, until the construction of the dwelling is completed.
On satisfactory completion of the construction, the restrictive loan conditions are removed as the Construction Loan converts to a standard home loan, home equity loan or other loan of your choice.
How does it work?
Construction of the dwelling will be completed in stages. There are usually 5 stages which are commonly known as Slab Stage, Frame Stage, Lock Up, Fit Out and Practical Completion. As each stage is completed, your building contractor will issue you with an invoice, calling for payment of the work completed. If the work has been completed to your satisfaction, you authorise the lender to pay the builder.
This means that the actual loan is drawn down gradually through ‘Progressive Payments’ to the building contractor, with the full loan amount usually being drawn down by completion of the construction. Sometimes, on completion of the construction, there are extra loan funds made available to the borrower which can be used for other worthwhile purposes like Window Furnishings, Landscaping etc.
As the loan will be drawn down gradually over time, this means that you will not pay interest on the full loan amount from day one, but on a progressively increasing loan portion up until the full loan amount is drawn.
You can also use your loan to firstly purchase or refinance vacant land and then follow on with the construction of a dwelling at a later date.
Construction funding is available in the form of a Low Doc or No Doc Loan and can also be combined within a Debt Consolidation Loan, Investment Property Loan, Refinance Home Loan and/or Home Equity Loan.
Building a dream or beginning of a nightmare?
Purchasing a parcel of land and building that dream home can be an exciting and rewarding experience but it can also quite easily turn into heartache. Whether your construction project fulfils your dream or becomes a nightmare will depend upon how well informed and prepared you are, how much time you are prepared to dedicate, the experience of your lender’s staff with arranging and administering construction loans as well as the support of your mortgage loan broker.
Understanding the building process, the building contract, the construction loan process and all other paperwork plus finding time to stay in touch with your lender and builder so you can successfully co-ordinate the process, can be a time consuming and daunting experience if everything is left to you and you alone.
The co-ordination of the building process and construction loan funding can be tricky, therefore it is reassuring to know that you are supported by a mortgage loan broker institution that not only has vast experience with construction loans but has also been through the building process themselves.
Community Best has been involved with house & land projects for many years and has vast experience in arranging the most appropriate type of construction loan finance you will need as well as supporting you with the co-ordination of the whole building process.
Construction Loan Tip
Arranging your construction loan, researching and carefully costing the construction project well before committing to the building contract, is very important. The first step to building your dream home is to know your maximum borrowing limit, because without knowing this, you could risk having insufficient funds to complete the entire project due to extra building work, over runs etc that were not allowed for in the building contract price.
Make sure you fully understand;
1. What the building quote/contract does not include?
Items like curtains, security screens, floor coverings, light shades, telephone and television connections, data cabling, antenna, clothesline, driveway, footpaths, paving, turf, landscaping, fencing, air conditioning are generally not included. It is not uncommon for these items to add an extra $10,000 to $30,000 to the contract price!
2. What are the PC allowances in the building quote/contract?
Pay particular attention to the PC (prime cost) allowances in the building contract. Allowances for doors & door furniture, tap ware, kitchen & bathroom fit out, white goods, floor coverings, tiling, paving, lighting etc may result in a lower grade finish than your expectations. Any variation you make to the contract PC allowances may need to be funded from your own pocket?
Construction Loans are specialist loans and need to be correctly structured and administered to aptly suit not only your personal requirements, but also your Builder’s Construction requirements as well as the Lender’s requirements.
At Community Best we will guide and support you through the whole process of costing the project, arranging a construction loan that will meet with all parties requirements and co-ordination of the funding with the building process right up until you have actually moved in.
To speak with our Construction Funding Specialist – Kevin Roby, phone the Finance Centre on 1300 448 911 or email us and we will arrange for Kevin to contact you.
* Loans subject to application and approval. Terms, conditions and eligibility criteria apply. Fees and charges may be payable.
Extra conditions may apply to the loan, until the construction works have been completed satisfactorily. On satisfactory completion of the works, the extra conditions may be removed as the ‘Construction Loan’ converts to a standard home loan or other home loan of your choice.