Construction Loans

A comprehensive guide to home construction loans in Australia, what they involve, and how to find one, all in one place with Savvy.

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, updated on August 31st, 2023       

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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.

What are construction loans and how do they work?

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.

What finance options do I have when buying land and building a house?

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.

How much will I need for a deposit on my construction loan?

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.

What documentation will I need for my construction loan?

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:

  • your building contract
  • your building plans
  • council approval to build your home
  • your builder’s current licensing/registration certificates
  • insurance details (both your builders’ and your own)

What progress payment stages are there in a construction home loan?

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.

Frequently asked questions about construction loans

Can I get first homeowner assistance if I’m building my first home?

Yes – first homeowners can apply for several government assistance grants and schemes, including schemes that guarantee a first home mortgage deposit and rebates for the cost of stamp duty in some states. The First Home Owner Grant offers a lump sum to help with the cost of the deposit, and the First Home Loan Deposit Scheme helps first-time builders with the cost of the deposit.  Use Savvy’s stamp duty calculator to work out how much you’ll be required to pay depending on what state you live in.

Is it cheaper to build a house or buy one that’s just been built?

It can be cheaper to buy an undeveloped block of land and build on it, rather than buy a home that’s just been built. This is because if you buy undeveloped land, you’ll only pay stamp duty on the cost of the land, whereas if you buy a completed house, you’ll pay stamp duty on the cost of the land plus the price of the home built on it, so you’ll end up paying far more.  Off-the-plan constructions also save you money because you only pay stamp duty on the price of the land and costs are naturally lower anyway.

Is it difficult to get a fixed-price contract with a builder?

No – it isn’t difficult to get a fixed-price contract as opposed to a cost plus contract (which means the builder produces invoices to prove expenditure as the project goes along, rather than working to a fixed price for all items from the beginning of the project).  You should be aware that fixed-price building contracts need to be highly detailed, specifying down to the tiniest details the quality, make, model and colour of all fixtures and fittings and appliances used in the construction and building process.

What if I can’t negotiate a fixed-price contract with my builder?

Sometimes it may not be possible to get a fixed-price contract with a builder.  Instead, you’ll be provided with a cost estimate. Builders do this to protect themselves against unforeseen circumstances such as variations in the cost of labour or building materials.  If you can’t get a fixed-price contract, you’ll need to be approved for a cost plus construction loan, also known as a variable construction loan. These loans allow for variation in the cost to build the home within specified, pre-defined limits.

Do many lenders offer construction home loans in Australia?

Yes – there’s a great deal of competition between lenders for loans for construction purposes, so it’s well worth comparing loans with Savvy to make sure you find a construction loan which perfectly suits your needs.  The best construction loans in Australia with the lowest interest rates are to be found by carefully comparing a wide range of loans from different lenders.

Are delays to be expected during the home building process?

Yes – on average, it takes between six and 12 months to build a standard three-bedroom home, but units and apartments may take longer if they’re part of a block or tower with multiple levels to build.  Construction delays are commonplace in the building industry, so you should prepare for them and make sure your lender gives you plenty of time to get the building works completed.

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