Building Your Dreams: Understanding Construction Loans
Building a house from scratch or planning home renovations can be a fun and rewarding experience, but it can also be a long and expensive one.
At ARG Finance, we can help you with the financial side of things by advising you on your options, which may include applying for construction loans. Our experts can provide guidance and support, keeping you informed and updated from beginning to end so that you get through the process easier.
Getting Started
WHEN & WHY CONSULT A MORTGAGE BROKER?
Construction loans are different from regular home loans. Before you proceed with the construction or renovation of your home, be sure to talk to a mortgage broker who can assist you through the process.
Our broker will be able to give you valuable advice and explain things extensively, including what construction finance is and how it can benefit you.
Construction Loan Facts
LOAN DETERMINANTS
The value of a construction loan taken up by a property investor will depend on the way the loans are compared. As such, you should have a fair amount of knowledge about the determinants of a good construction loan.
Interest rates
Construction loans need to be paid off only during the construction period. So, this means that the interest rate received will have an important bearing on the size of repayments.
Fees
Some construction loans include extra fees that need to be paid for at every stage of the construction loan till after the completion of each stage of the building. Below are some of the fees that you need to know about.
- Construction Administration Fee: You need to pay this fee to the builder, whenever a satisfactory bank or credit union account for electronic payment transfer is not made available. This fee rounds up to approximately $13.
- Electronic/ Telegraphic Transfer Fee: Every time that you request the lender to complete an outward electronic transfer, after the settlement of the construction loan, an approximate amount of $50 needs to be paid.
- Production Fee: A production fee of approximately $99 is payable as and when there is a request to produce a title at the Land Titles Office or consent to any lodgement.
- Restructure Administration Fee: A fee of about $100 is payable by the borrower, each time a request is made to the lender to restructure the facility.
- Consent Processing Fee: You are required to pay this fee if you make any request to the lender to consent to matters that may include 2nd mortgage, Deceased Estate, Lease, Easement or Transfer of Ownership or a loan variation. This fee rounds up to about $100.
FEES PAYABLE ON THE REPAYMENT OF YOUR FACILITY
The lender may also charge you for costs that are payable in the event the lender requests assistance from its solicitors or settlement agents to effect the restructuring of your loan, to consent to a dealing affecting the security property, or in the event of a construction loan repayment default.
- Lender’s Administration Fee: You pay this fee at every point of discharge of mortgage.
- Construction Drawdown Fee: This fee, usually an approximate amount of $300, is paid by the borrower prior to the first progress drawdown payment on all construction loans.
- Loan Processing Fee: You need to pay this fee for processing and settling a new loan.
- Annual Fee: You need to pay this fee, approximately $120, annually on initial drawdown according to your loan terms.
QUALIFYING REQUIREMENTS
INVOLVEMENT OF A QUALIFIED BUILDER:
It is essential to involve a qualified builder/ licensed general contractor in building or renovating your home, as financing institutions that allow you to act as your own general contractor are hard to find.
DETAILED RENOVATION SPECIFICATIONS:
This consists of floor plans and details of materials that are going to be used in renovating the home. It is a comprehensive checklist known as the blue book wherein every detail is assembled by builders.
ESTIMATE OF HOME VALUE BY APPRAISER:
In construction home loans, it is next to impossible to appraise something that is non-existent. As a result, a lender must have an appraiser to consider the blue book and specs of the house. The appraiser must also be asked to determine the value of the land where the home is being built on.
LARGE DOWN PAYMENT:
You need to pay a minimum amount of 20% as down payment for residential construction loans, but some lenders require as much as 25%. The payment ensures your investment in the project and that you won’t just walk away if things go wrong. The payment also acts as a protection for the bank or the lender in case the cost of construction for the house does not turn out to be worth as much as expected.
LOAN DOCUMENTS CHECKLIST
PERSONAL IDENTIFICATION
Your personal identification should amount to 100 points. A current Passport or Birth Certificate equals 70 points, while a driver’s licence contributes up to 40 points. If you are married, a copy of your Marriage Certificate will also be required. You can ask your mortgage broker for other types of identification to reach the necessary 100 points.
INCOME DETAILS IF SALARIED:
- Two most recent payslips from your employer mentioning the name of the company, payslip number and the year-to-date income figure
- The most recent group certificate from current employer
IF SELF EMPLOYED:
- Last two year’s personal and business tax returns
- ATO assessments
- Additional income details
Loan Documents Checklist
Other types of documentation that can be used for construction loans in Melbourne include:
- Photocopy of a credible builder’s fixed price tender consisting of all specifications
- Photocopy of plans approved by Council
- Rent income statements
- Proof of share dividends or interest earned
- Centrelink letter which confirms family tax benefits
- Centrelink letter which confirms permanent government pensions
- Private pension group certificate, or a statement
- Proof of any other regular ongoing income
Explaining the Loan Process
Step one
Find offers for construction loans:
It’s important to research and compare construction loan offers from varied sources before making a final decision, as the construction loan interest rate can differ greatly from regular home loans.
STEP TWO
Ensure you have a clean credit history:
Prior to applying for a construction loan, make sure your credit history is clear. Also, get yourself into a good financial position. The first step for approval of a loan is evidence of savings. If you own a block of land that you intend to build a home on, then this is a great first step. This will act as your deposit on the property.
STEP THREE
Prepare your documentation according to construction stages:
Construction loans for builders are taken forward in stages. For this reason, you will not receive all of the funds in one lump sum. The five common stages that are involved include:
- Foundation/Slab
- Frame and Brickwork
- Lock Up
- Fixing (plastering, etc)
- Completion
You need to present a professional evaluation and estimation of the construction plan before handing them over to the lender for home loan approval. The lender gets a complete pre-assessment of the assumed value once the house is completed. After this, arrangements are made to convert owner builder construction loans to a regular home loan.
STEP FOUR
Construction plan evaluation:
The lender will scrutinise your construction plans and may conduct an appraisal or inspection to determine the project’s value and feasibility.
STEP FIVE
Distribution of funds to the builder with completion of each key stage:
Funds are given to the builder upon completion of stages of construction and an assessment of the construction site to ensure that the work is proceeding according to the plan. The progress payments are appropriately matched to the stage of home construction.
You should always remember that the loan amount will only be forwarded at a stage upon completion when a valuer or surveyor has confirmed that the work has been done satisfactorily.
STEP SIX
Approval from council:
Prior to approval of the final payment of your construction loan, you must present an occupancy certificate, issued by your local council. Until you have taken this step, lenders will not advance your funds.
The occupancy certificate ascertains that your property is fit to be a residential property and assures the lender that they can go ahead with the process of switching your construction loan to a standard home loan.
STEP SEVEN
Insurance and safety:
Last but not least, do not forget to take out a builder’s risk insurance policy to safeguard your lender and yourself against any unforeseen damages, especially if the work has been contracted out to a builder with commercial liability insurance.
STEP EIGHT
All set and ready to go. You can now get the interiors done. Have fun!
Frequently Asked Questions
Can you get fixed rates on construction loans?
Yes, it’s possible to get fixed rates on construction loans, but it’s offered by very few lenders. Mostly lenders offer fixed rates on the land portion or land loan only. A fixed rate offers a stable interest rate that doesn’t change during the term of the loan, giving borrowers predictability and budgeting certainty. However, it’s important to note that fixed-rate construction loans may have higher interest rates than variable rate loans and stricter qualification requirements. Additionally, fixed-rate construction loans may have penalties if the borrower pays off the loan early.
What do you need to know about construction loans?
Construction loans are special loans used to finance the construction of a new home or renovation of an existing property. They typically have higher interest rates than traditional mortgages and require a larger down payment. These loans are structured differently from standard mortgages, with funds being disbursed in stages as the construction progresses. Lenders typically require detailed project plans and budgets as well as regular inspections to ensure that the project is progressing as planned.
Do you need a mortgage on construction loans?
Yes, a construction loan typically requires a mortgage to secure the loan and ensure repayment. The mortgage is used to provide collateral for the loan so that, in the event the borrower defaults on the loan, the lender can foreclose on the property and sell it to recoup their losses.
How do new construction loans work?
Construction loans are used to finance the construction of a new home. The amount is usually based on the estimated value of the completed project and the funds are paid out in stages as construction progresses. Borrowers typically make interest-only payments during the construction phase, after which the loan is converted into a traditional mortgage. Borrowers will need to provide detailed plans and cost estimates for the project in addition to making a down payment. The lender will also require regular inspections to ensure construction is progressing according to plan.
Call or Email Us Today
Make ARG Finance your first choice when you need advice and guidance on new build construction loans. Visit our contact page for more details about how to get in touch with us.