What You Need to Know About Construction Home Loans
Some people prefer to build their homes from scratch instead of buying an already established real estate property. If you plan to take this route, then a construction home loan is the right loan product for you.
Homeowners planning for a house renovation can also apply for a construction home loan to finance their remodelling project.
What Makes a Construction Loan Different?
A construction home loan has a different loan structure compared with loans designed for people who purchase already built homes. Unlike regular home loans, lenders release construction home loans instalments called progress draws.
When computing the loan amount, the lender will consider how much you will need for your builder. The computed total amount is then divided into progressive draws that you will pay to your contractor during construction.
Many lenders will only let you pay the interest during construction. However, once the house is complete, you will need to pay for both principal and interest.
How are Progress Draws Paid Out?
While it may differ from lender to lender, lenders usually pay out the draws of a construction loan in these stages.
· Foundation or Base
The lender will give you the amount to start with for laying down the foundation or base. It includes the levelling of the ground and the installation of waterproofing and plumbing.
In this stage, the building site should already be clear of any debris or vegetation. Laying of the foundation usually takes about two weeks. Once this stage is complete, the amount paid out is usually 10% of the total fund.
The next payout will usually be to cover the framing of the house. The amount should be enough for the roofing, trusses, partial brickwork, insulation, and windows. Framing takes longer than the laying of the foundation. After this stage is completed, the payout is around 15 to 20% of the total cost.
The third payout will be for the walls, doors, and windows, which can be locked. This step will make the house lockable and protected from the elements. This stage usually takes about four weeks. The third progress draw after the lockup is the biggest payout of the loan, at approximately 20 to 35% of the total fund.
The fourth payout will be for the installation of fittings and fixtures. These can include plumbing, electricity, gutters, benches, and cupboards. At this stage, you already have a semblance of a home. Fixing and fit-outs will take around six weeks to complete. Payout after completion is around 20 to 30% of the fund.
The final payout will be for the finalisation of the construction project. It includes finishing touches such as painting and fencing.
Since the payout is given out in tranches, the interest is computed based only on how much was already paid out by the lender.
How to Apply for a Construction Home Loan
Applying for a construction loan has different requirements compared to getting a regular home loan.
First, you will need to submit the following documents:
- Council-approved building plans and specifications
- Copy of your contract with your chosen licensed builder with a fixed price indicated
- Applicable insurance policy
- Proof of income and expenses
An appraiser will then determine the expected value of your property. Once approved, you will need to make at least a 5% deposit. However, deposits below 20% will require you to get an LMI.
How to Choose the Right Construction Loan
When looking for a construction home loan, here are the things that you should consider.
- Interest Rates – Look for the comparison rate of loan products, including the fees that you need to pay.
- Extra Fees – These fees can include additional administration fees.
- Features – These are the added benefits you can enjoy from a loan.
- Construction Terms – Make sure to check if there is a condition on how long you can build your house and the requirements when accessing your funds.
Choosing the right type of home loan can help make your home building experience easier and smoother. Let us help you find the right home loan product for your future dream home.