Construction loans are designed to assist people who need finance to get a house built. They’re structured slightly differently from conventional home loans to allow for the extended time it takes to build a home. Read on to learn all about construction loans, how they work and why they might be right for you with Savvy.
Construction loans are home loans designed specifically for people wanting to build their own home. The main difference between them and a conventional home loan is that construction loans in Australia are paid in stages directly to the builder, rather than being paid to the borrower.
Typically, a 5% deposit is paid to the builder and approximately another 20% of the purchase price as each stage is reached. These payments are known as progress payments. Construction loan rates are usually slightly higher than variable rate loans and can either be variable or fixed interest-only loans.
Quite often, the loan only extends until construction is complete and either the loan is paid off, refinanced or reverts to a standard principal and interest home loan with a variable interest rate.
The finance options you have depend on whether you already own land and wish to build on it, if you want to buy a parcel of land and build later or choose to go with a house and land package.
If you already own land: you’ll just need a loan to cover the construction cost of your home. Choose from a variable or fixed interest rate construction loan, either paying interest-only or principal and interest. Loans on which you pay the principal and interest from the beginning of the agreement work out to be cheaper than those with interest-only periods. Low doc construction loans are also available for self-employed applicants who aren’t able to supply two years’ worth of tax returns.
If you wish to buy land and build later: construction loans usually have a time limit (between six and 18 months), so if you wish to buy land and wait to build, a construction loan may not be the best option for you at the beginning of your journey. You may need to first get an investment or loan to buy your vacant land and either get a second construction loan when you’re ready to build or refinance your investment loan to a construction loan down the track. Compare your options with Savvy and talk to your lender about the best option available for your personal circumstances.
If you’re after a house and land package: some property developers team up with builders to offer house and land packages, where one loan covers both the purchase of your land and the construction of your house. These construction home loan packages offer the convenience of just dealing with one lender for all your finance needs, but they may not always offer the best construction loan rates in Australia. Make sure you compare home loan packages before committing to the one recommended by your builder, as construction loan rates do vary widely and there’s plenty of competition to ensure there are always affordable offers on the market.
Lending criteria do vary between different financiers, but most will require a deposit of between 5% and 10% of the amount you wish to borrow, although others may require up to 20%. Lenders will calculate your loan-to-value ratio (LVR) as part of assessing your construction loan application. Your LVR is calculated by dividing the estimated value of your home once it’s built by the deposit you can provide and multiplying this figure by 100.
If your LVR is higher than 90% (or 80% with some lenders), you’ll usually be required to pay for Lenders Mortgage Insurance (LMI). This is an insurance premium which protects lenders from the possibility of mortgage default. It is an additional cost which borrowers have to pay to protect their lender and can amount to thousands of dollars.
Construction finance requires you to provide additional documents compared to the standard ones needed for a traditional home loan. Standard documents you’ll need to supply for a home loan include:
Suitable identification to prove your ID
For example, your driver’s licence, passport and Medicare card
Proof of income
For example, payslips, tax returns or Business Activity Statements if you’re self-employed
Evidence of any assets you own
This includes all vehicles you may own including trailers, caravans or other recreational vehicles. Also include any bank account savings you may have, plus any other investments or items of value, including your superannuation
Details of any debts you have
This includes any personal or car loans, all credit cards and any store lines of credit you may have (including ‘buy now, pay later’ agreements)
A budget showing all your monthly income and bills and expenses
You can create your budget with Savvy’s budget planner calculator. This is important to show you can meet your loan repayments once all your other living expenses have been paid
Additional documents you’ll usually need to supply for construction loans include:
The concrete slab/foundations are laid ready for building to begin. In some states, this means the site has been prepared and the stilts or stumps installed if a home raised off the ground is to be built (such as a Queenslander or a home built in a cyclone-prone area).
Next, the building frame is completed, either using wood or steel (or a combination of the two) for the main structural support beams and roof. It’s at this stage that frames for items such as recessed mirrors and bay windows are built.
By this stage, most of the external framework is complete (such as walls, verandas and staircases) and the home can be locked up to prevent unauthorised access. External cladding is complete, heating and cooling ducts are installed and the garage frame and roof are finished. Bathroom and kitchen plumbing is in place.
In this stage, the home is fitted out internally, with internal walls, doors and window frames installed. Electric wiring and gas piping is laid before the flooring is installed. Waterproofing for wet areas is installed and plastering finished.
This stage is also known as ‘fit-off.’ Tradesmen such as electricians will come in and install light switches, power points and fluorescent lighting. The plumbers will finish connecting sinks, showers and the bath tub plus taps and bathroom accessories. Plastering and painting are finished and floor coverings such as carpets or floorboards are installed. By the end of this stage, your new home is complete and ready for handover. Once the last stage payment has been made to the builder, you’ll be handed the keys to your new home.