Angela Dye outlines the fundamental of a construction loan, and your obligations when you undertake building your new home.
A construction loan is used to fund the construction of a new property or to complete major renovations on your existing home.
Obtaining a mortgage to fund the building of your new property is not the same process as a regular home loan. With regard to income evidence and funds to complete the purchase, the paperwork your finance provider will need is much the same; however, they will need many additional documents relating to the build. These documents include a signed, fixed-price build contract to show the proposed works, Council approved plans, your builder’s licence and insurance details.
Regular home loans release a lump sum at settlement to fund the purchase, whereas in a construction loan the funds are released for the land settlement and the construction portion of funds is held by the lender and paid as periodical progress payments at the different stages of construction. This protects both you and the lender as most lenders will send a valuer at various stages to ensure the work that the builder has invoiced for has been completed.
Generally, there are six stages of drawdown with a construction loan:
the deposit stage
the base or slab stage claim
the frame stage claim
the enclosed stage claim
the fixing stage claim
the practical completion stage claim.
All construction loans are interest only during the construction period and depending on the lender, usually revert to Principle & Interest at the completion of the construction.
Interest on your construction loan is only charged on the amount of money that you have drawn down. For example, if you have been approved for a construction loan of $200,000 but have only drawn down $50,000 you will only be charged interest on the $50,000. Your monthly payment will increase with each drawdown until the loan has been fully drawn. All construction loans are interest only during the construction period and, depending on the lender, usually revert to principle and interest at the completion of the construction.
Before the final drawdown has been paid the lender will require a final valuation report. This is to confirm that the property has been completed as per the build contract and requires no additional work. They will also require a Certificate of Occupancy from the builder, which will confirm that the property is safe for the new owners to live in. You will be required to supply a building insurance policy with the lender noted as an interested party. They will then release the final payment.
Once the final payment has been made the builder will prepare the property for handover to you, or if you are leasing the property you can arrange for the handover to be to the real estate agency that you choose to manage your new property.
Depending on the state, some governments have concessions for stamp duty, and also offer incentives when you build a new home rather than buy an established dwelling. It is important to check what you are entitled to as this can be another benefit to building a new home.
Ask Ang about construction loans.