Owner-Builder Loans

Find out how owner-builder loans work when you want to buy land and construct your own home here.

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, updated on August 7th, 2023       

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If you’re looking to construct your home from the ground up, you’ll probably need an owner-builder home loan to turn your dream into bricks and mortar. Owner-builder loans help keep loan repayments low during the building phase of a new home. Read on to find out more about construction loans and how they can be used to ease the financial stress of building.

You can compare different home loans with Savvy and have all the information you need to get the best loan interest rate and loan terms possible.

How does an owner-builder loan work?

This type of loan (otherwise known as a construction loan) is specifically designed for people who want to build their own home or renovate an existing dwelling.  Instead of receiving your loan all at once, the lender releases the loan money in stages and pays your builder directly with progress payments.  During construction, you pay interest-only instalments just on the actual dollar amount which has been released.

Once construction is complete, the loan usually reverts to a more standard principal and interest (P&I) loan, or you refinance to a standard owner-occupier loan. The amount you’re able to spend to build your home will depend on the loan amount your lender has pre-approved for you, which will be determined by how much deposit you’re able to offer and what repayments you can afford.  Typically, lenders require a larger deposit and offer higher loan interest rates for owner-builder home loans.

Most construction lenders will offer a loan equivalent to 65% to 70% of the build value of your new home for first-time builders.  The build value is an estimate of what the house will be worth once it’s complete.  Experienced professional builders can be approved for up to 80% to 95% of the build value.

What are the stages of an owner-builder construction loan?

The average build usually has around five to seven stages and sually given between 12 and 24 months to complete the building of your house starting from the signature date on your building contract. Each construction stage is assessed by the lender before they release funds for the next stage to proceed.  The release of money on your behalf is known as a draw-down on your loan.  These are the typical common stages of a property build and the approximate percentage of your loan amount released at each stage:

  1. Deposit and block clearance: 10%
  2. Foundation or slab pour: 10%
  3. Framing or brickwork: 20%
  4. Lockup: 20%
  5. Second fix: 30%
  6. Completion and handover: 10%

How much does an owner-builder loan cost compared to other home loans?

Expect much higher administration fees with construction loans compared to standard home loans.  Some lenders charge a one-off administration fee at the start of the owner-builder loan approval process (often around $600-$800), while other lenders charge a fee at each stage as they release funds (often around $75 per stage.)  These fees can add up and need to be taken into account when comparing owner-builder mortgages.  In comparison, many online lenders are now offering standard P&I loans with no setup or administration fees at all, although these can come in at around $150 to $700 and $5 to $20 per month, respectively.

Additionally, since owner-builder mortgages are secured by an asset that hasn’t yet been constructed, lenders are taking on more risk than with a standard mortgage, and so they’ll likely charge you a higher interest rate.  Standard P&I loans for a borrower with over 20% deposit can often attract lower interest rates, whilst owner-building loan interest rates will typically be 0.5 to 1 percentage point higher.  Savvy can help you compare mortgages side-by-side so you can see which offer is right for you.

What documents will I need for an owner-builder loan?

Getting approval for an owner-builder construction loan is more difficult than getting a standard home loan, and frequently involves plenty of paperwork.  This is because, in addition to assessing your suitability as a borrower, the lender also has to look at the risks involved with the dwelling you’re proposing to build. To be successful, you’ll need to have a good credit history.  Lenders will require all the standard home loan documentation, including:

  • proof of ID – 100 points
  • your income details
  • a list of your existing assets and liabilities
  • details of your monthly bills and commitments

In addition, you’ll likely need to supply the following:

  • Council building permits and plans
  • Professional building plans
  • Proof of land purchase
  • Your contract with the builder
  • Progressive payment schedule
  • Proof of insurance
  • A contingency plan in case things go wrong (for example, proof that additional insurance has been taken out to fully protect the owner-builder)

What insurance will I need before I get approved for an owner-builder home loan?

All lenders will require you to have adequate insurance to cover you as an owner-builder in case anything goes wrong during the construction period.  The exact insurance you’ll be required to take out varies from lender to lender, but the most common types of insurance are:

  • Construction Works insurance. Also known as Contract Works Insurance, this covers any damage to the site or property that occurs during the build, including theft of materials and vandalism.  It also protects you in case a natural disaster such as a bushfire or cyclone destroys your partially-built home.
  • Domestic/home warranty insurance. This insurance will protect you if your builder doesn’t complete the project on time, is late to complete a stage deadline, or goes bankrupt during construction.  It also covers you for serious structural defects and for legal costs which may be incurred if a court case results. 
  • Public Liability insurance. As you’re responsible for everything that happens on your building site, public liability insurance will protect you if workers are injured during construction, or if your neighbour’s property is damaged during the building process.
  • Personal accident/injury insurance.  This should cover you and your family in case you’re injured whilst visiting or inspecting your house as it’s being built.  Some personal accident insurance contracts specify that anyone on the building site must wear personal protection equipment, so check what the requirements are in your policy.

How does the application process for an owner-builder construction loan work?

Got a question about owner-builder loans?

Can I start building my new home once I get pre-approval for my owner-builder loan?

No – it’s essential you don’t start building until your final loan is approved.  It’s also a good idea to make sure the building plans are finalised and you have full council planning permission with no variations made once construction starts.  Also, ensure you have extensive insurance before starting your project.

What happens if construction is delayed past my construction loan deadline?

If something goes wrong, you may need to apply to your lender for additional funds or ask for a time extension on the loan.  Most lenders are understanding if a natural disaster or bad weather delays building progress, but be aware the lender is under no obligation to give you extra time or money to finish the house. You’ll find many lenders will be reluctant to refinance a partially-built house if you look to refinance with a different lender.

At what stage do I receive my first payment on an owner-builder loan?

You don’t actually get to see any of the loan money, as your lender pays your builder directly.  The first draw-down on your new loan will often be to purchase the land you’re going to build on, and the next draw-down will be the builder’s deposit before construction starts.

At what stage do I have to pay my deposit after I’ve been approved for my construction loan?

Your lender will only start to allow draw-downs and contribute to the build after you’ve paid the deposit and contributed your share of the build value.  For example, if you’ve agreed to cover 30% of the cost, the lender will only issue the first payment once you’ve already paid this amount.

Can I get a low-doc owner-builder loan?

If you’re a professional builder and you’re self-employed, there are low-doc options available.  However, if you’re not a professional builder or tradesperson who is going to do much of the construction work yourself, it’s highly unlikely you’ll be approved for a low-doc owner-builder construction loan.  In general terms, a higher credit rating is required to get this type of loan.

Can I get a P&I variable interest rate owner-builder loan?

Yes – just like any other regular home loan, you can get a P&I variable loan up to 5 years as an owner-builder.  This type of owner-builder finance is more unusual than interest-only loans for construction, but it’s still possible to find a construction loan with a variable interest rate.

Can I use a guarantor for an owner-builder loan?

Yes – owner-builder loans with guarantors operate in the same way that most guarantor-backed mortgages work, so a smaller deposit as low as 0% may be accepted and the total loan amount may be increased.  The guarantor will need to provide their financial details to the lender as proof they’re able to repay the loan if you default.

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