Construction Home Loans
Building and construction loans
A building and construction loan provides funding for building a home from the beginning or extensive renovations to an existing property. The main way building and construction loans work is they provide an interest-only facility with a variable interest rate during the building period. While the building is being constructed interest is only paid on the amount drawn down or paid out.
Building and construction loan types and requirements
There are a few different types of construction loans available and these will depend on your requirements and the amount of finance needed. The low doc construction loan does not require as much financial proof as a standard loan, however most low doc loan are set at a higher interest rate. The standard construction loan is variable and will need to have some or all of the following requirements:
- A fixed-price building contract with a licensed builder. This will include: Proof of builders insurance, the building time frame or period.
- If you are an owner builder you will need to present detailed costings and quotes plus all relevant insurances like owner builders warranty insurance, construction and public liability insurance.
- Your council approved plans and specifications of the proposed building.
- Your council approved construction certificate allowing you to start.
How progress payments Work of Construction loans
Most homes are constructed in five stages but the payment process involves six payments. The first payment is always a deposit which is generally around five per cent of the construction price. This first deposit is paid when you sign the building contract. The other five progress payments are typically made at the completion of the five different stages of the construction process.
- Slab or base floor
- Frame and external
- Lock up
- Fit out
- Practical completion
At each stage the builder will invoice you and assuming you are happy you submit that to your lending body or bank. The lending body or bank will then pay the builder on your behalf.
Owner builders process payments
If you are an owner builder the stages work much same way as you inform the bank or lending body of the progress. However the bank will release the finances to you to pay for materials and contractors. This may vary depending on how the bank or lending body has structured your loan.
The ‘Subject to finance’ clause
All reputable land developers and builders will insert a finance clause in the contract. However it is up to you to make sure that this is part of the contract. The subject to finance clause is important in three main ways.
- It will reserve your land and new home and effectively take it off the market.
- It gives you time to secure your construction loan and have the paper work ready from the bank.
- It safe guards you in case for any reason your loan is declined. The subject of finance clause allows you walk away from the contract legitimately without any adverse consequences or debt.
There are many home loan lenders who offer construction loans with fixed interest, variable interest, and low doc loans available. If you are in the market for a construction loan or building loan shop around and secure a deal that suits you.