Building or Construction Loans
A building or construction loan provides funding for building property or extensive renovations in a way that means you have the lowest possible repayments during the construction phase.
What is a building or construction loan?
Building or construction loans generally operate as an interest-only facility with a variable interest rate during the construction period, before reverting to the whichever final home loan you have negotiated with your lender. During the building or construction period, you only pay interest on the part of the home loan that has been drawn down, or paid out.
Access a wide range of building and construction loans
To access Loan Market's wide range of building and construction loans or talk to a mortgage broker about the home finance options that are in your best interest whilst building, call us on 13 LOAN (or direct on +61 2 9249 3739) or email us the form on this page.
What type of loans can you use to finance property construction?
Most loans can be used to finance property construction. The only difference is that during the construction stage, you may not have access to all your loan features and repayments are generally interest-only.
How do construction loans work?
Most construction loans have a variable interest rate, however there are some available that operate as fixed rate loans. If you do use a fixed rate construction loan, you may end up with one rate on your land loan and a second, different, rate on your construction loan.
Approval for a land and construction loan is a little different to approval for an established home. Often the land and building purchase will need to settle separately. To accommodate this, your initial loan will be run as two separate but simultaneous applications, one for the land purchase and the second one for the completed house and land cost. The second application will eliminate the first loan, leaving you with just the one loan.
Most lenders will also require that you build on your land within two years of actually settling on your land. You don’t need to finish the home within the two year time frame, you just need to start within two years of settling on your land.
A home is constructed in five stages but involves six payments. The first payment is the deposit, generally five per cent of the land and construction price. In most instances you will need to pay this upfront when you sign your contracts.
TIP: You may be able negotiate a smaller deposit upon signing the contract, with the balance to five per cent% being paid once you receive formal finance approval.
Your construction contract will detail the exact cost of the build, with the cost broken down into the six payments the builder requires.
As each stage of your home is completed, the builder will invoice you for that stage. Assuming you are happy with the work, you will submit that invoice, along with an authority from you instructing your lender to pay the builder, to your lender for payment. Your lender will then pay your builder on your behalf.
The bank only charges you on the amount of money you have drawn down, therefore your minimum repayment will vary depending on which stage your home has reached.
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‘Subject to finance’ clause
All reputable land developers and builders will insert a finance clause in the contract they prepare for you. A finance clause serves a number of purposes:
- It takes your land/new home “off the market”,
- It gives you time to secure formal finance approval. The process will take less time if you have already organised a formal pre-approval [link to pre-approval page]; and
- If for some unforseen reason the lender declines your application at the last minute, the finance clause allows you to walk away from the contract legitimately and without adverse consequences.
What is the construction process?
New homes are built in five stages, with payment on each stage due after the builder completes it. Therefore the bank will draw down your loan in five stages. Theses stages are:
- Base/slab
- Frame
- Lock Up
- Fixing
- Practical completion
For more information on building or construction loans
For more information building or construction home loans that are in your best interest, talk to your local mortgage broker and we will return your enquiry within 2 business hours. Or call us at any time on 13 LOAN or direct on +61 2 9249 3739.
