Looking for a construction loan? Are you a developer, planning on renovating or building? Undertaking a construction can be an exciting and sometimes stressful experience. Getting your finances in order should be your first step in the process before you start looking for land or a property to build.
Construction loans can be complex. Since building is complicated enough without the complication of the financing, you are best to obtain a construction loan that is definitely right for you, so you can focus on making your project a success.
Not all banks have construction loans and some have construction loans but don’t do them well. Depending on the lender you may get charged higher interest rates or fees on a construction loan. Many construction loans allow you to draw down your payments progressively as payments are made on completion of each stage of the building. This means that you only pay interest on the money that has been drawn. However, there can be a range of fees and charges such as drawdown fees, and lenders typically want to have the progress inspected with fees and charges associated with this. The last thing you need is a holdup with your construction because of trouble getting the bank to make progression payments. However, there are some which do not do progress inspections or charge drawdown fees.
After the construction phase is finished you may also be able to convert your construction loan into an ongoing home loan or investment loan.
A construction loan is a type of mortgage for people that want to build a new property.
Construction loans aren’t set up like a normal home loan at the start. The total amount that is needed to complete the building is approved by the lender. These funds are then placed in your loan account. As progress is made on the property by the builder, the construction loan is progressively drawn down to make the progress payments to the builder. Usually you only need to pay interest on the amount of loan that has been drawn (taken out to pay the builder). Loan payments typically remain interest-only during the construction phase, reverting to principal and interest after the construction is complete.
Construction loans can be used for house and land packages, they can also be used to build on vacant land that you already own.
No, you do not need to buy a house and land package to get a construction loan. You can still use a construction loan if you have already purchased a vacant block of land (including if you used a regular loan to help you buy the vacant block of land), and then engage a builder. It’s only when you sign a building contract with your licensed builder that you’ll need a construction loan. However, doing it this way you will have two separate home loans. You could still refinance them into one later.
Yes, construction loans can be used to finance small property development projects. Construction loans are available from some lenders for small residential property developments of 2 to 4 units or townhouses on a single title. This type of development can still be considered as a construction loan and subject to normal home loan interest rates and loan to value ratios.
No, not always. Most lenders will prefer that you use a licensed builder to construct your home before they approve a construction loan for you. However, some lenders will allow you to build your own home as an owner builder. This is ideal if you are a qualified tradesperson or if you have a building license of your own.
An owner builder mortgage is a type of construction loan where you construct the property and as an owner builder (without having a contract with a licensed builder for the builder to build the property for you).
Owner builder mortgages are considered high risk by the lenders. This is because the property that you are going to construct is being used as the security for the loan by the lender. If you default on the loan the lender will need to recoup their costs from the repossession and sale of the property. The bank considers that as an owner builder you may not be as professional as a licensed builder.
Because of the extra risk that an owner builder has, most lenders will not approve owner builder loans.
Lenders that do offer owner builder mortgages will typically limit you to a low loan to value ratio, 60% of the total vacant land value and construction cost. The completed property value is not considered in the valuation of the property for owner builders. The construction costs (quotes from tradespeople and for building materials) will be scrutinized to establish the costs to complete the construction as a ‘to be erected’ (TBE) valuation amount. The loan amount that you can borrow will be a proportion of the value of the vacant land and TBE valuation amount combined up to a maximum loan to value ratio.
Yes, low doc construction loans are available. Generally they have the same interest rates but lower maximum loan to value ratios available compared to full documentation (full doc) construction loans. See more here about low doc construction loans.
Construction loans are specifically designed for people who are constructing a building. A construction loan will allow you to draw down on the funds as progress is made on the building and payments need to be made. In this way you can save money on interest costs as you are only paying interest on the funds that you have drawn down. If you are building a property some (or all) of the other home loan types will not be available to you depending on your situation.
How much you can borrow is influenced by a number of factors including:
It is also important that you are comfortable that you are able to repay the loan without having financial difficulty, not just with today’s interest rates but even when interest rates increase as this will affect your loan repayment amount.
The amount of deposit you will need will depend on your situation. Depending on your situation the amount of deposit you will need could be between 5% and 20% of the total value of the combined land and completed property. Speak with a competitive mortgage broker to find out how much you will need.
Most lenders will require that an inspection is made by the lender’s representative (to check that progress is according to the building contract) before each fund drawdown and progress payment is made. These progress inspections usually require a fee. Always check with your mortgage broker if you would like to make any variations to your building contract prior to proceeding. This will ensure that progress payments are not delayed due to the lender not knowing about or agreeing to the variations.
In a construction loan your builder is usually paid in progress payments which occur as various stages of work are completed. Drawdowns are the funds that are taken out of the construction loan to pay for the progression payments.
Most construction loans have approximately five drawdowns.
These drawdowns are often at the following stages but may vary depending on your building contract:
The builder will usually send you a progress invoice each time a progress payment is due. Your lender may also require you to sign a progress payment form that they will provide to you. You will need to send this form back to the lender along with the progress invoice. Once the progress payment is approved by the lender, the builder will be paid from your loan account.
Some lenders will want to ensure that any construction is approved by the council so you may need to provide plans approved by the council when applying for your construction loan.
A fixed-price tender (as opposed to a cost plus contract) from a registered builder will be needed so that the lender knows the total price that will be paid to complete the project.
You should also note that you may need to use your saved funds or equity before drawing down on your construction loan.
After your loan is approved what other items do you need to provide prior to commencing construction?
Yes, you may still get a construction loan even with bad credit.
People that do not qualify for a traditional construction loan because they have bad credit are still able to apply. This includes people with an unlimited number of defaults, judgments, and writs up to $1,000 (paid or unpaid) or higher on a case by case basis.
However, if you have bad credit it is likely that your interest rate will be a bit higher than a standard construction loan without bad credit.
Talk to your trusted brokers about getting a bad credit construction loan.
Yes, you can get a construction loan for unfinished house. Some lenders will accept an incomplete home as a security. However, incomplete or unfinished property will be considered at the land value only unless the construction is 90% complete.
This may be suited to a builder that experiences trouble (due to partnership breakup etc.) partway through building a house and need to refinance. It may also be used by a builder that is purchasing an unfinished construction planning to finish it themselves.
Some other costs associated with a construction home loan include:
Stamp duty is a state government tax and is usually the largest expense after the property purchase price.
The amount of stamp duty that you will need to pay will vary depending on the state or territory where you purchase the land or property. See more here about Stamp Duty.
Loan set-up costs are also called establishment fees or loan admin fees by the banks. These may include legal fees, mortgage registration fees, and associated fees and will vary depending on the lender and the loan that you get.
You may also require Lender’s Mortgage Insurance (LMI) depending on your loan to value ratio (LVR). If your loan to value ratio is high and your loan amount is also high, lenders mortgage insurance costs can be significant costing several thousands of dollars and your third greatest cost after the property price and stamp duty.
Look out for hidden fees and charges. Some lenders do not have application fees or valuation fees but then charge a large admin fee.
If you purchase land or property you will need to take legal ownership of it by transferring the title from the seller’s name (the vendor) into your name(s). This process of transferring ownership is called conveyancing. A conveyancer is a legal representative and may also be a lawyer that specializes in the field of conveyancing. Before purchasing (signing the contract of sale) you should have a conveyancer or lawyer review your contract of sale and inform you of any potential issues or surprises. Conveyancing cost varies with the conveyancer or lawyer that you use and how much they charge. Usually, conveyancing will cost $2,000 or less.
Finding a reputable builder is the first thing to do after you’ve made the decision to build. Next, you will need to enter into a building contract with a licensed builder. The contract is a legally binding document. Ensure you read the fine print!
It is your responsibility to go through the terms and conditions with your legal representative. Never sign anything unless you are 100% certain you understand what it means.
Ask the question to your builder—do you have all the necessary insurance policies in place? While the lenders do not need to sight the following documents, it is strongly recommended that you obtain the following documents from your chosen builder:
Remember: At the completion of your construction you will need to obtain an Occupation Certificate, also known as an Occupation Permit, from your local council.
There are 10 steps to the construction loan process. These are:
A broker from a reputable mortgage company will contact you to discuss your situation, your objectives and the loan features or benefits that you need. Your broker will then take this information and match it with the available options. Different options will then be analyzed to determine which loans are suitable for you. Your broker will present the options to you and discuss the pros and cons of the different options and ask you to select an option. Once you have confirmed your selection the process moves to the next step.
The mortgage broker will then complete the loan application for the loan you have selected and discuss with you what documentation you will need to provide with the loan application. At this stage your mortgage broker will also go through your financial situation (income, expenses, assets, and liabilities) in detail to ensure that you meet the lending criteria for the loan amount and lender that you have selected. After receiving all of your required documentation (payslips etc.) your broker will submit your application.
Once your application has been submitted to the lender that you have chosen, the lender will assess your application. They will check to confirm that you meet their serviceability and credit requirements. During this stage the lender will confirm your income, employment, expenses, assets, and liabilities through your supporting documents and a credit check. If the lender requires more information you may be asked to supply further documents during this step.
Your mortgage broker will be notified by the lender that your application is conditionally approved. The lender will also specify any conditions that need to be met before an unconditional approval can be given.
Usually your conditional approval will be conditional on the valuation being sufficient. The lender or sometimes your broker on the lender’s behalf will order a valuation.
The valuer would require the land contract, plans, specifications and building contract of the house you are going to build. It can take 3–5 days to complete the valuation.
Approval will only be needed from the Lenders Mortgage Insurer if you are borrowing with a Loan to Value Ratio of greater than 80% (your deposit is less than 20%) and you need Lenders Mortgage Insurance.
When you receive unconditional approval for your loan application it means that all conditions and criteria required to assess and approve the loan application have been met. You will then receive a formal Letter of Offer from the lender. Mortgage documents will be prepared and will be sent directly to you.
The lender will prepare the letter of offer, mortgage documents, terms and conditions of the loan you have selected, and any other documentation that is relevant.
When taking out a loan it is important to ensure that you have the appropriate insurance cover. The lender may require that you have the property appropriately insured. There are also other types of insurance that you may want to get to ensure that you are appropriately covered.
There are four main types of insurance you may want to obtain, these are:
Your insurance may be needed prior to the settlement of your property purchase and loan settlement.
You need to sign and have witnessed your mortgage documents and send them back to the lender. After this the settlement is arranged via your solicitor/conveyancer. If a solicitor/conveyancer is not needed then your mortgage broker will make sure that settlement is completed.
Funds from the construction loan are usually taken out (known as drawdown) in stages if payments are due to the builder when each part of the construction is completed. You will only pay interest and repayments on the amount that has been drawn down so your repayments will increase as progress is made on the building. Some lenders offer interest-only payments on the loan during the construction phase. Upon completion of the dwelling, the construction loan will revert to the loan product originally chosen by you.
Low doc construction loans
Are you self-employed and want to get a construction loan but don’t have all of your proof of income documentation? A low doc construction loan may be an option for you. Low doc construction loans allow flexible options for proving your income.
Owner builder loans
Are you planning to build your own home as an owner builder and need finance for it? Find out all you need to know about owner builder loans.
Construction loans with bad credit
Are you planning to build your dream home but have bad credit problems? Bad credit construction loans are available from some understanding lenders. Find out what you need to know about getting a construction loan with bad credit.
Large property development project finance
Are you undertaking a large property development project? Large property development project requires a different type of finance to a construction loan. Find out about property development finance here:
Oak Laurel – Development finance made easy!