Building your own house can be a wonderful and fun experience, but it can also be a long and expensive one. Hence, a construction loan may help you. We are here to help you get through the process easily and to keep you informed and updated at every step, all the way till the end.
When & why consult a mortgage broker?
Construction loans are different from the regular home loans. So, before you go ahead with the construction or renovation of your new home you should talk to a mortgage broker who can lead you through the process.
A mortgage broker will be able to give you valuable advice and explain extensively, what a construction loan is and how it can benefit you.
Construction Loan Facts
The value of a construction loan, taken up by a property investor will depend on the way the loans are compared. So, you should have a fair 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 where 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 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.
- Involvement of a Qualified Builder: It is essential to involve a qualified builder/ licensed general contractor in building or renovating your home because financing institutions that will 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 wherein every detail is assembled by builders known as the blue book.
- Estimate of Home Value by Appraiser: In construction loans, it is almost next to impossible to appraise something that is non-existent. So, 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 put down a minimum amount of 20% as down payment for a construction loan, 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 was expected.
Loan Documents Checklist
- Your personal identification should amount to 100 points. A current Passport or Birth Certificate equals 70 points, and a driver’s licence contributes up to 40 points. If you are married and a copy of your Marriage Certificate would also be required. You can ask your mortgage broker for other identifications to sum up to 100 points.
- Two most recent payslips from your employer mentioning the name of the company, payslip number, and the year-to-date income figure; and
- 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
- 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 1: Find the best offers for construction loans
Research and compare construction loan offers from varied sources before making a final decision as interest rates for construction loans differ greatly from the regular home loans.
Step 2: Ensure to have a clean credit history
Prior to applying for a construction loan, guarantee that your credit history is clear. Also, get yourself into a good financial position. The first step for approval of a loan is the evidence of savings. If you own a block of land that you intend to build a home on, then it is a great first step. That will act as your deposit on the property.
Step 3: Prepare your documentation according to construction stages
Construction loans are taken forward in stages and for that reason you will not receive all of the funds in one lump sum. The five common stages that are involved are:
- Frame and Brickwork
- Lock Up
- Second Fix (plastering, etc)
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 the construction home loan to a regular home loan.
Step 4 : Make your deposit
Make a deposit to the loan company or purchase the lot of land where the home is to be built on. This acts as sufficient security for the loan at this stage.
Step 5: 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 works are proceeding according to the plan. It is ensured that 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 only upon completion when a valuer or surveyor has confirmed that the works have been satisfactorily done.
Step 7: Approval from council
Prior to approval of the final payment of your construction loan, you require to 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 8: Insurance and safety
Last but not the least do not forget to take out a builders 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 9: All set and ready to go. You can now get the interiors done. Have fun.
Frequently Asked Questions
Most banks and lenders will allow you to borrow up to 95% of the value of the land including the construction costs. If you are unsure about how much you can borrow, then get an estimate with our Borrowing Power Calculator.
Some states in Australia allow people to include a finance clause when signing the contract for their vacant block of land. This clause is most frequent in cases when someone purchases a vacant land or an established home through a private treaty sale. Here, the clause “Subject to Finance” can be used.
The main reason for adding specific information like this clause is, to protect an investor against having to accept finance that isn’t right for him/her or their situation. So, if you happen to receive a pre-approval from your lender and they already know their interest rate, then this information too can be entered into the clause.
Construction Completion Period
Most construction loans in Australia allow a period of two years for completion of construction of a new home. If the land purchased is a part of the construction loan, then the time starts after a land purchase has been settled. When construction is complete, we will arrange a final inspection for the property.
Progress Draw Payment
A progress draw payment or draw down is an individual payment that the bank pays an investor’s builder for a respective stage of work that is
completed. Mostly, you might be allowed to make some extra payments from the mortgage, even though the construction loan is in the stage of “progress draw.”
Builder’s insurance covers the builder from going broke. However, if a builder happens to get broke prior to the completion of construction of your home then another builder can be appointed to complete the renovations of the home. The loan company will then compensate for any cost difference that may come up.
If you are an owner-builder then be wary that some institutions place tighter restrictions on this type of lending. These restrictions might consist of a reduction, in the amount available for borrowing, as opposed to people who use a separate licensed general contractor under a fixed price contract. Restrictions which are strained or do not have the ability to borrow, are in place due to the owner-builder loans being classed as a high risk category.