Construction loans

Building dreams


Building your dream home can be an exciting and proud achievement. There are however important considerations when obtaining finance as well as the builders contract you will be required to sign.


Construction loans – how they work
When you take out a construction loan, the funds are not advanced upon settlement as they would with a purchase. Funds are released and paid to your contracted builder as “progress payments” on the completion of each defined stage of the Building Contract, e.g. completion of slab, framework, and so forth. Both the existing value and an “on-completion value” is used in calculating how much the lender is prepared to advance.
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Why do lenders require a fixed price contract?
Lenders are generally unwilling to fund owner-occupied projects because of the many risks associated with owner-builders many of whom do not have building experience. Some of the risks include running over budget, inability to raise funds to complete the project, overcapitalising and incurring costly errors.
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How is interest calculated during the construction phase?
Until the first progress payment is made, there is no interest charged on your loan. Charges commence from the first progress payment that is made to your builder. Payments are usually calculated on a variable, interest-only basis on the amount drawn down. On completion of the project, depending on which lender you use, you may be able to switch the loan to another product.
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How do progress payments work?
The Builder’s Contract will have a schedule of progress payments which will need to be made throughout the building process. Usually there are between 3 to 6 progress payments. An invoice is issued by the builder and the lender will send a representative to inspect that the work is completed to satisfaction before releasing a payment. Some lenders will pay the builder on your signed release that the work has been completed. In this case, it would be wise to consult with your architect that the work is done to standard. There is always a final valuation performed before the final payment is made.
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What documentation will I require?
In additional to your income and financial information, the lender will want to see the architectect’s plans and engineering reports, council approval, a fixed-price contract from a builder and building insurance. Depending on the location or previous use of the site, other information such as environmental assessments may also be required. Once satisfied that all conditions have been met, including a satisfactory end-value, the lender will then grant an unconditional approval.
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