What is a construction loan?

When you're planning to build your own home, understanding the difference between a construction loan and a standard home loan is crucial. It's a question we get asked frequently, especially with the increasing number of knockdown and rebuild projects we assist with.

Get a construction loan and receive funds as you build. Start today!

Here’s a quick guide to help you understand how they work.

What is a Construction Loan?

A construction loan is designed specifically for those who are building a new home or undertaking a major renovation. Unlike a standard home loan, which provides a lump sum of money upfront, a construction loan releases funds progressively in stages as construction progresses.

How is a construction loan different from a standard loan?

Here’s how the two types of loans differ:

• Payment Structure:
  • A standard home loan provides a lump sum of funds upfront. This is ideal when you're purchasing an existing property.
  • A construction loan, on the other hand, provides funds in stages based on the progress of the build. These stages are called progress payments and align with specific phases of construction.

Common construction loan stages:

1. Base or Slab Stage: Site preparation, excavation, plumbing, and laying the concrete slab.
2. Frame Stage: Building the frame, including beams, roof trusses, and walls.
3. Lock-up Stage: Installing external walls, windows, doors, and roofing.
4. Fit-out Stage: Adding internal fittings like plasterboard, cabinetry, and fixtures.
5. Completion Stage: Final touches, including painting, flooring, and landscaping.

Note: The stages may vary depending on your builder’s contract, so it’s important to refer to that for specific details.

Lender inspections

Lender inspections can vary depending on the lender. Some lenders may inspect at each stage, while others may only inspect at certain stages of the build. These inspections ensure that the construction is progressing as planned and within budget before releasing the next set of funds. This process helps to make sure that the project stays on schedule and that the funds are being used appropriately. It's important to check with your lender for specific inspection requirements and the stages they will review.

Applying for a construction loan

While applying for a construction loan is similar to applying for a standard home loan, there are additional documents you'll need to provide, specific to the building project. These typically include:

• Standard Loan Documents: Identification, proof of income, details of assets and liabilities.
• Construction-Specific Documents: A fixed-price building contract, a contract of sale for the land, council-approved plans, builder’s insurance, and permits.
• Documents During Construction: Progress payment invoices and receipts for any out-of-contract items.

Every lender may have different requirements, so it’s important to clarify these early on with your mortgage adviser.

Additional considerations:

• Budget for Extras: Don't forget about landscaping, fencing, and appliances.
• Set a Contingency Fund: Unexpected costs can arise, so it’s a good idea to set aside extra funds for this.
• Expect Delays: Weather, labour shortages, or material delays can impact construction timelines.
• Local Amenities: If you’re building in a new estate, local amenities may not be fully developed yet.

Understanding the specifics of construction loans is vital to ensure you’re fully prepared for the financial commitment of building your home. If you're ready to begin your journey, don’t hesitate to reach out to us. As your mortgage adviser, we’re here to guide you through your options and help make your dream home a reality!

Contact us today to explore your construction loan options and start building your dream home!