Are you looking to build a dream home but feeling overwhelmed by your financing options? Home construction loans can be a great way to finance the purchase of materials and labor required for constructing a new home, so you can turn those visions into reality.
While the process may seem overwhelming at first glance, we want to make sure you have all the information necessary when considering applying for a home construction loan on the Gold Coast.
In this post, we’ll provide an overview of how home construction loans work and how you can be eligible for one.
What is a construction loan?
A home construction loan is a short-term loan that is used to finance the building of a property or to make additions or renovations to an existing property.
It is usually granted for a specific period of time and is used to pay for the costs of construction as the work is being carried out.
The loan is then typically paid off when the construction is complete and the property is sold or refinanced with a traditional mortgage.
The terms and conditions of a construction loan can vary depending on the lender, but they are typically secured against the property being built or renovated.
How does construction loan work?
A construction loan works by providing the funds necessary for a borrower to construct a building or make improvements to an existing property.
- The loan is usually disbursed in stages as the construction progresses or after the completion of specific project milestones (i.e., progress lending). The lender may require regular inspections to ensure that the work is being carried out according to the agreed plans and budget.
- Construction loans with progressive drawdowns allow the borrower to access the loan funds as needed during the construction process or in stages, rather than receiving the full amount upfront.
- The borrower will make interest-only payments during the construction period, with the principal balance being due when the construction is complete.
- Once the construction is finished, the borrower may need to refinance the construction loan into a traditional mortgage. This is to pay off the balance of the loan and take ownership of the property.
- This refinancing process involves paying off the outstanding balance of the construction loan with a long-term mortgage, which may have a lower interest rate and more favorable terms for the borrower.
Are rates on construction loan higher than a traditional mortgage?
In general, interest rates on construction loan are higher than those of traditional mortgages. These rates:
- compensate lenders for the perceived higher risk, as the property being built or renovated is not yet complete and therefore has no established value; and
- help ensure that lenders are able to recoup their investment if the construction project is not completed or if the property does not sell as expected.
Terms and conditions of construction loans can vary greatly between lenders. Some lenders may offer more favourable terms and lower interest rates for home construction loans.
What can you use a home construction loan for?
In Australia, a construction loan can be used for the following purposes:
- Building a new home: A construction loan can be used to finance the construction of a new home from start to finish.
- Renovating or extending an existing property: You can use a construction loan for renovations or extension of an existing property.
- Building multiple dwellings: A construction loan can be used to finance the construction of multiple dwellings, such as townhouses or apartments.
- Building a commercial property: A construction loan can also be used to finance the construction of commercial properties, such as office buildings or retail spaces.
How to be eligible for home construction loans
To apply for a construction loan in Australia, the following requirements are typically needed:
- Proof of income including pay stubs, tax returns, and employment contracts.
- Good credit score
- Detailed construction plans and budget
- Proof of ownership or agreement to purchase land
- Deposit of at least 20% of the property price to avoid paying Lenders Mortgage Insurance
- Builder’s insurance
- Building contract
Shopping around for home construction loans? We can help
Home construction loans are the real deal to finance your building, renovation, or extension project. By getting the lowdown on what construction loans entail, you’ll be well equipped to make an informed choice.
And if you’re feeling overwhelmed, don’t worry — that’s where I come in. My team and I would be more than happy to sit down and discuss what is required to find you the right home construction loan for your personal circumstances.
Give us a ring and watch your building project go from concept to masterpiece!
Phil’s journey from banking to mortgage brokering reflects a career driven by a commitment to personalised service and tailored financial solutions. With a distinguished background in banking, including roles at NAB, ANZ and Lloyds TSB Bank in the UK, Phil spent 12 years developing expertise in personal and commercial finance, while also completing a Bachelor of Business (Finance), followed by an MBA majoring in International Business.