A construction loan is a particular type of loan tailored for the construction of new homes. Murray Home Loans has assisted many customers with this, so speak to us and get a comparison of loans.
In the Port Macquarie area for instance we are seeing a large amount of construction as hundreds of lots of land are coming on to the market. It is quite popular with first home owners since NSW only offers benefits for newly constructed properties. For others, it is about building the dream house that won’t need any renovations for years to come.
A construction loan differs from a normal home loan in that it has a series of progressive drawn-down. That is, you draw down the loan (or increase your borrowing) as needed to pay for the construction progress payments. The important thing to note is that the work is completed first before payment is made, and payment is usually made directly from the lender to the builder.
Generally, the payments will be made at upon completion of five stages:
To apply and get approval for a construction loan there are 3 key requirements:
Own the land for it to be built on (outright or with a mortgage, it doesn’t matter).
Have a signed fixed price construction contract which sets out specifications and plans, and includes a progress payment schedule. For anything else (carpets, landscaping, driveway, etc) you will require quotes.
Have council approved and stamped plans. This is to say that the build location, plans, specification meet local guidelines.
We have a great resource available to take you through the loan and builder process – download our Borrowers Guide To Construction Loans
Some Points to Note:
A construction loan will usually be interest-only during the construction phase and then revert to a standard principal and interest loan thereafter.
A construction loan can be used for funding a brand new home, or it can be used for significant structural changes like adding on a second level.
Most lenders offer construction loans in the loan products, so there is no shortage of choice.
There are some extra bank fees involved in a construction loan, but they are minimal in the scheme of things – some lenders charge an admin fee of $50-70 per drawdown, some a flat amount of $250 or $300, It varies by lender. There are a few that also charge for additional valuations or inspections along the way.
There are many builders and their construction contracts do vary. Some will include everything to give you a 100% complete house to live in. Other contract might not include items such as window coverings, landscaping, fencing, swimming pool, carpets, driveway, etc). We can still look at funding all of this. So, for a customer, the really important thing to understand is what is included in the contract and what is not included. This way you can budget to have a completed house and know how it will be funded. Most builder also ask for payment of a small deposit, usually somewhere between 3% and 5% of the total cost.
For first home owners the benefits vary state by state. If we use NSW as the example the stamp duty exemption applies when the land is purchases and the first home owners grant is usually paid when the slab is laid.
As obvious as it is you must think about how you will fund where you live during the construction of you new house. As your house is being built you will be making repayments on the land if you have a loan for it. You will also be paying interest on a growing construction loan. And lastly you will be paying your mortgage, rent or board for where you live in the meantime. So, it is important to budget for this.
A construction loan can be run in conjunction with a Guarantor Loan (to borrow 100% of costs) or a Refinance (with the other loan part funds the land and/or build).
You might be wondering how it is that you can borrow money for a house that hasn’t been built. The reason it works is that the lenders use an as-complete valuation. That is, a valuer has looked at the land value and establishes what the current market value for that property would be if build right now. Then the lenders lend the standard LVR percentages again this, with the loan secured against the finished house.
Her is an example of the type of applications we see for constructing a new home.
Like all home loans we first need to assess income and expenses to ascertain the borrowing capacity for all borrowing parties. Also, we need to consider how the loan will be funded.
We also sit down with the customer to discuss how much money might we required after the construction, for example to furnish it or to replenish savings. Then we structure the land loan and the construction loan. We usually submit 2 loan applications; the first being unconditional approval to buy the land and the second being pre-approval for the construction.
The first step is to purchase the land. In most cases people buy a vacant lot of land. The land is already connected to mains electricity, water and sewerage (unless being set up as off-grid). The land is registered. The alternative is buying an existing house to knock down or to renovate.
The next step is to find a builder. In larger towns and cities there are many to choose from. You can even visit display villages where they have ready-built houses you can walk through. Then you can commence discussions on price and specifications. The builder can give you a quote which can then be fleshed out into the required fixed price contract.
You then need to get the design plans approved by council. Most of the large builders look after this aspect. However, for structural renovations or architect designed homes this usually requires you to work with the builder to get this presented to council for approval (costs vary by council).
Now that you have the final signed fixed price contract and any variations, plus the council approved plans you can now apply for unconditional approval for the construction loan.
Once approved this is when you would pay the builder the 3-5% deposit and the builder can commence work.
At the same time loan documents are issues, signed and returned.
As each stage of the house is built the process is the same – once the stage is complete the builder will invoice you for payment. You then forward that to your broker and acknowledge that the work has been carried out to your own satisfaction. This is then sent with a form to the lender who processes payment, usually directly to the bank.
The final payment is varies slightly. As well as the normal requirements, the lender may require a final valuation/inspection of the finished property to ensure it has been built to the expected standard. The will also require you to have a house insurance policy in place, starting just before you more in. Once the final payment is made then you can move in to your completed home.