What's so special about construction loans?


Time to build the dream home. You've got your land, you've spoken to the guys at Inspired Residential and drew up your dream home and have the contract to build, time to go to the bank? Sure, but a construction loan isn't like a normal loan.

First things first, if you've bought your land and it is already registered you'll need a land loan straight away. They're straight forward. If the land isn't registered yet I would suggest speaking to a broker before signing anywhere just to make sure you will be able to borrow the funds needed. Once the land is within 6 months of registering I would reapproach the broker and get a pre-approval for a loan. At this point if you are wanting to build sooner rather than later I would be finalising your design and getting a final fixed price for your construction. 

The valuations of land and construction loans are pretty straight forward also. The valuer will need your fixed price contract for construction and if you've just bought the land they will need the contract of sale. Most of the time the valuer will add the land price and the construction costs together and that's the value of your house. They don't look to see if you're building the house cheaply and value it higher. 

Structuring your loans can change the outcome a lot. With the land loan you can have it set up with interest only repayments so that repayments are cheaper while you're building. This is because it is expected that you will be paying to live somewhere else while building your new house. Alternatively you can have it set up with principal and interest repayments to pay down the principal owing. More on the different loan repayments here. With the construction part of the loan you don't really get a choice. Most banks will force interest only repayments on construction (when I say most I have only one lender out of more than thirty that will allow P&I repayments on construction). This is due to the way the loan is charged. Your builder is required to bill you at 5 different milestones during the build. The first one is when the slab is poured, then the frame goes up and then 3 more up until practical completion. The builder sends you invoices which are called progress payments. No bank will give you the funds to pay for construction up front, the bank will want to control the funds and make sure the builder is doing their job properly. This means that your mortgage amount is always changing as each progress payment will increase your mortgage. At the completion of construction your loan can be changed to principal and interest repayments.

There are a couple of banks that will charge you at principal and interest rates for the interest only construction loan but most will charge you the interest only rate (P&I rate may be 3.79% but interest only rate might be 4.29%). You can't go past the options and visibility of a broker to find the most suitable product for you.