A construction loan is a type of mortgage designed for people wanting to build a new home.
Depending on how your loan is set up, a construction loan can be processed differently to a normal loan. For example, I have had clients that purchase the vacant land first and then arrange to build on the block within a specified time frame.
Construction loans aren’t set up in quite the same way as a regular mortgage in the beginning. Instead, the lender considers the total amount you need to borrow in order to pay your builder and then breaks down the full amount into separate payments, called progress draws. These are percentages of the total building contract amount paid to the builder throughout the construction process out of your mortgage funds.
While progress draws are being made, the majority of lenders will only expect you to pay the interest due on the amounts that have been drawn. Your full principal and interest payments won’t begin until after the handover has taken place and you have received the keys to your new home, meaning during the construction process you save on interest.