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How to Deconstruct a Construction Loan: What You Need to Know

In the market to build a new home rather than buy an existing one?

Congratulations, it’s an exciting time. Plus, if you’re a first-time homeowner, you may be eligible for the First Home Owner Grant (FHOG) government incentive which can potentially save you $10,000 or $20,000 in regional areas.

Building your own home literally from the ground up is an enjoyable journey but buyers should be aware that it is a process that is inherently different from purchasing an established property.

While there are obvious factors specific to building that need to be considered such as landscaping, fencing, and driveways, it’s also important to keep in mind that the finance you will need to build a house is different in comparison to a traditional home loan that you would need to purchase an existing home.

Construction loans V Traditional home loans 

A home loan for an established property is a lump-sum that is released by a bank as a closing payment once the house settles.

But when you’re building a home yourself, you’ll need to explore and apply for a construction loan well before you build, as a construction loan is systematic and allows your finance to be paid in stages as the build progresses.

With each construction phase of the building process—such as the base, frame, lock-up and fixing stage—your lender will pay the builder an installment of the total construction loan. Your builder may refer to these installments as ‘progress payments’ or ‘drawdown payments’. In a nutshell, it means you’re drawing down on your loan (or increasing your loan’s balance towards the approved limit) to pay for each part of the build.

Construction loans may also require plans, permits and a fixed-price building contract to be approved for finance – making it essential to engage an experienced finance broker early in the process.

In fact, with the introduction of Comprehensive Credit Reporting (CCR), you’ll need to make sure your finances are in order at least six months before you even intend to apply for a construction loan.

Benefits of construction loans

Just like the wide variety of options available for buyers in choosing the right builder or floorplan, construction loans also offer plenty of choice for consumers and their individual financial needs.

If the house you’re building is not your first home and you’ll need to sell your current house to pay for your new property, talk to one of Inovayt’s experts about a construction loan as part of a relocation loan.

These loans, sometimes referred to as a ‘bridging loan’, allow you to settle on your purchase before you sell your current property, making the transition to your new home seamless, while also eliminating the hassle of moving to a new house twice. Our team can help you consider whether finding a lender who offers this type of construction loan will be of benefit to your situation.

Keep in mind there are a variety of construction loans available and a wide variety of lenders to choose from who may offer different choices – for example, some lenders may inspect each building phase before releasing a progress payment.

Regardless of which construction loan you choose, it’s essential that you do your research well before you apply. With access to 48 lenders and a no-obligation consult, Inovayt can help find the right construction loan to enable you to build your dream home.

Our experts are adept at handling construction loans as standard business and can provide you with clarity on how they differ to standard home loans and what you should be aware of before you apply.

By engaging Inovayt for your construction loan and avoiding the need to deal directly with a bank, you’ll also simplify the loan process.  Our mortgage brokers can service the progress payments for your construction loan, rather than leaving you with the stress of having to coordinate everything on your own with your lender.

This extra effort and a clear understanding of the process of construction loans is just one of the benefits of using a mortgage broker. Your broker should do as much as they can to inform you and prepare you for the journey of building a home – particularly if you’re a first home buyer and entering the lending process for the first time.

Should you require more information or clarity on any of these topics, please contact us today on 1300 354 355.

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The information contained on this website is general in nature and is no way intended to be legal, financial or investment advice. The information provided is not intended to be taken as, or relied upon as financial advice or providing recommendations in relation to any financial product. You should seek independent financial advice from a licenced financial services advisor to check how this information relates to you and your circumstances. Inovayt Pty Ltd and Inovayt Wealth Pty Ltd does not accept any liability for injury, loss or damage incurred by the use or reliance on the information provided on this website.

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