What is a Construction loan?

A Construction Loan is a interim loan for financing the cost of constructing your new home. Lenders will secure a mortgage over the real estate property you are financing and they will make progress payments to your builder at periodic intervals as the work progresses.

How is a Construction Loan Funded?

Lenders have different credit policies and requirements that they adopt when processing a construction loan application.

Here is a list of how lenders fund construction loans:

  • Lenders will fund the loan amount required by you to cover the cost of purchasing a vacant land and for the building construction costs
  • Before construction starts and if you have already borrowed to purchase vacant land on which you are building your new dream home, the first loan disbursement made by the lender will go towards paying off the vacant land.
  • Lenders will break down the loan amount into “progress payment drawdown” amounts, which are made to the builder at the completion of each construction stage

How is a Construction Loan Structured?

Construction loan, whilst it is similar to a traditional mortgage, has some key differences. Here is a list of the key features of a construction loan:

  • It is typically a short-term solution with a maximum of one year
  • The borrowers will be expected to pay Interest Only payments during the construction period
  • Interest is only calculated against the portion of the loan amount that has been drawn down
  • Construction of your new home must commence within 12 months of loan settlement
  • Construction of your new home must be completed within 12 months of the first progress draw down payment

When are Progress Payments Drawn Down?

Lenders will arrange to prepare valuations before progress payments are made to the builder and at the completion of each of the following construction stages:

  • For the purchase of the vacant land
  • After the laying of the flooring
  • After the installation of the roof (including the frames)
  • At lock-up stage
  • At the completion stage

What Happens with the Construction Loan at the Completion of the Building Project?

Upon completion of the building project, your loan will roll over into a standard Principal and Interest home loan.

What Additional Documents are required for Processing a Construction Loan?

Lenders will need to see copies of the following documents, before issuing unconditional approval:

  • Fixed Price Building Contract
  • Council Approved Plans and Specifications

Now that you have understood everything about construction loan in detail, apply for a construction loan package and build your new dream home no matter your credit profile.