When both land and construction fees are bundled into a single loan, the lender is relieved of the risk of the finished property being valued less than the size of the loan. There are a number of conditions related to the home’s construction that must be met under the construction loan.
In a normal home loan, a lender provides you with the loan amount in full once all the conditions are met, but that is not the case in a construction loan. A construction loan progresses in stages and these stages are termed ‘progress draws’. The exact number of stages in a construction loan varies, but mostly there are five stages used for determining payments. These five stages can include:
2. Frame and Brickwork
3. Lock up
After the completion of each stage, the money is given to your house builder as per the contract. A qualified valuer may be sent by your lender to the construction site to ensure that the builder is completing the work according to the set plan and the payments that are being advanced to the builder align with the construction stage.
Funds are given to you in instalments, so most lenders typically require the interest to be paid on the amount that you have actually drawn. For instance, a construction loan of $500,000 is given to you, but since the construction is in early stages, only $100,000 have been drawn from it, so you’ll only have to pay interest on the $100,000 that you have drawn. What this means is that construction loans allow you to save money in the payments of interest.
Once the construction has been completed and the complete amount of the loan has been drawn, you’ll have to pay full interest repayments and principal on the construction loan. When you reach this stage, you can choose to convert the construction loan into a home loan or it can even be combined with your other loans.
Alterations are common in the contracts of buildings. If you’re only making a minor change that won’t have a huge impact on the price, you should try paying for the changes yourself so that your construction loan contract doesn’t get affected. However, if you’re planning to make major structural changes like adding one more room to your house, you’ll have to get in touch with your lender. If your loan needs to be reassessed by the lender, your building project will encounter delays.
Lenders are more cautious with construction loans. It is very different than typical home loans, therefore, their requirements are more stringent. Here are a few tips that can help you qualify for a construction loan.
The most important thing is the lender. There are many lenders out there with different rates so shop around and choose the one with the best rate.
Like most other loans, lenders require a good and clean credit history for construction loans. Thus, you must ensure that your finances are in order before applying for a construction loan. Pay your outstanding bills (if any), take care of debts (if any) and clean up your credit report before applying for a construction loan. Seek help from a financial advisor to sort out your credit history.
Your mortgage lender will require you to show that you can save. Most lenders require evidence of genuine savings of 3 months while some accept 1 year of renting instead of genuine savings.
Another way, you can gather a deposit for construction loan is through a family guarantee. This means that a close member of your family can use their home’s equity as a security for your construction loan. Guarantors don’t help with your repayments so you must be able to show to the lender that you are capable of meeting all the repayments. However, not all mortgage lenders in Australia accept a family member as a guarantor.
You must be able to repay the construction loan to get approved for it. Therefore, your expenses, income and employment history will be thoroughly reviewed by your mortgage lender. Your Lender will see if your income is steady and you have a good work history. Lenders must make certain that you are capable of meeting the requirements of the repayment once building construction is finished and the stage of making interest and principal repayments comes.
Your mortgage lender will require the details of your construction plan. Lenders need to ensure that the completed property will not be lower in value than the size of the loan. Your lender will request the builders insurance, license of your builder, contact to build and plans approved by the council.
A final inspection of the property will be arranged by your lender to ascertain that the property is completed according to the specifications proposed in the plan. Once the construction is over, you will have to make interest and principal repayments.
If you have any more questions about construction loans, call us on 1300 537 000 and talk to our construction loan experts.