Fans of Grand Designs, The Block or House Rules might think building a house from scratch is easy. But a home isn’t built in a day.
If you choose to build your own home, you’ll need what’s called a construction loan. Lenders don’t tend to offer traditional loans to those wanting to build their own properties – the risk involved puts some lenders off entirely.
To begin with, they have to consider the possibility you never finish the project, or that you overspend on construction. Either scenario could lead to you defaulting on your loan repayments.
A construction loan is a loan sought to facilitate building of some kind – be it a house or renovations, knock down or rebuild.
Construction loans, accessible once a buyer has purchased land, enable borrowers to access their loan amount in stages. In other words, lenders structure the loans so you receive a payment only when you reach a new stage of construction.
This means the borrower doesn’t have to make repayments on the full loan until they are ready to move into the house. If your lender has released 60% of the loan, you only make repayments on that 60%.
It also protects the lender as it prevents the borrower from spending the entire loan early on and ending up with nothing to finish the project.
Once you’ve found a reputable builder and drawn up plans for your property, you’ll get a building contract which includes the cost, construction terms and a Progress Payment Schedule (PPS) which is a schedule of the payments you’ll need to make to your builder.
Your PPS will typically include 5 or 6 stages of construction, from foundations to framing, fit out and finishes.
A construction loan aligns with the payment scheme your builder puts in place. At the end of each stage of construction, your builder should give you an invoice. You send this invoice to your lender, and they release the next loan payment for the project. Your builder receives their payment and moves onto the next stage.
Your lender will provide a percentage of your construction loan for each stage, which may look something like this:
Banks and lenders may structure their construction loans slightly differently. Below is an example of a Westpac 5 stage loan.
UNO works with many lenders which offer competitive construction loans, including Bankwest and St George, both of which have dedicated progress payment teams to help with the drawdown process.
Chat to a UNO expert to learn more about construction loans.
The stages of the construction process have been outlined above. There are other things to know before you get started though.
For one, most lenders require that construction commence within 6 months from the Disclosure Date on the home loan contract. Construction may also need to be completed within 24 months.
In addition to your loan application documents, you’ll also need to supply to your lender:
As with standard home loans, the greater your deposit, the less risk you pose to the lender. Because many people go over budget when building a home, it’s good to save as much as you can before commencing work – and continue to save throughout the process.
A construction loan aligns with the progress payment scheme your builder puts in place. Each progress payment is called a draw down and interest will be charged on the amount drawn down at the time.
Unlike standard home loans where you pay interest on the full amount from the start, with a construction loan you only pay interest on what you draw down. So if you draw down $50,000 of a $500,000 loan to begin with, you’ll only pay interest on that $50,000. You’ll pay interest on the rest as the construction continues and you draw it down.
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