Construction Loan
Construction Loans Australia
NEED A LOAN TO BUILD A NEW HOME OR INVESTMENT PROPERTY?
Do you need help financing the construction of your new home or investment property? Are you planning a major renovation, extension or knockdown/rebuild? If so, you may want to consider getting a construction loan. Whether you are a property developer, a commercial builder or you’re looking to build or renovate your own home, construction loans can be the ideal solution.
No matter where you are in the property cycle, the right loan and structure can make all the difference. This is why it’s so important to seek expert advice before applying for finance.
A trusted construction loan broker can help you access the best rates and terms for a wide range of construction home loans. Having the best finance to suit your needs will ensure that your project is completed on time, with minimal issues.
At Sunshine Coast Financial Solutions, our experienced team of brokers can help you secure a competitive loan that is ideally suited to your particular circumstances. We can help you throughout the entire process, from initial consultation right through to post-settlement.
For access to the best range of construction loans in Australia, book a free consultation with the team at Sunshine Coast Financial Solutions today.
What Should You Know About Construction Loans?
If you’re thinking about applying for a construction loan, you probably have a lot of questions. For instance, you may be wondering:
- What are construction home loans?
- How do construction loans work?
- Why are rates for construction loans higher than a standard mortgage?
- When can you use construction home loans?
- What is the best finance structure for construction loans?
- How can you efficiently draw down a loan for construction?
- How do you apply for a construction loan?
Initially, the whole process may seem a little overwhelming. But fortunately, it doesn’t have to be. Our expert team of brokers have put together the ultimate guide to construction finance so you can find answers to all your questions and make informed decisions.
What Are Construction Home Loans?
Construction loans are typically short-term loans designed to finance the construction or renovation of existing properties. Unlike traditional mortgages, the funds are usually released in stages as the construction work progresses.
One of the main benefits of having a construction loan is that you’ll only pay interest on the funds that have already been released. Once construction is complete and all of the funds have been released, then you can either convert the loan into a permanent mortgage or arrange for the balance to be paid off in full.
When applying for a construction finance loan you will generally need to provide the lender with a detailed scope of work and an itemised budget for the proposed build. The lender may also require a larger deposit when compared with a traditional home loan.
Construction home loans may be suitable for individuals or developers planning a range of projects, including:
- Building a new home
- Large-scale renovation
- An extension on an existing property
- Knock-down and rebuild
- Commercial construction project
- Property development
How Do Construction Loans Work?
So, how do construction loans work?
Unlike traditional home mortgages, loans for construction are usually released in stages or “drawdowns” as the construction project progresses. This means that you won’t receive the full loan amount upfront once your loan settles. Instead, you’ll receive the funds in instalments as certain milestones are reached in the construction process.
For example, you may receive an initial percentage before the work begins to cover the cost of preliminary tasks. Once the house slab or foundation works are complete, you’ll receive another percentage. This will continue until the project is complete and all funds have been released.
The drawdowns you receive from the lender will mirror the progress payment schedule outlined in your building contract. As work progresses, you’ll need to send your lender copies of the builder’s invoices and progress reports so that they can organise for funds to be released to the builder. This helps to keep the project on track and guarantees that the released funds are being used properly.
Construction loans usually have a short loan term, ranging from just six months to up to two years. Once the project is complete, you’ll have the option of converting your loan into a traditional mortgage or paying off the balance of the loan within the specified term.
Why Are Rates for Construction Loans Higher Than a Standard Mortgage?
You may have heard that interest rates for construction home loans are higher than those applied to a standard mortgage. While this might initially seem outrageous (are the lenders just trying to rip you off?!), there are actually some valid reasons why lenders charge more for construction finance:
1. Higher Risk
Construction projects come with a higher level of risk for lenders. If the project is delayed, the quality of the workmanship is subpar or if the project experiences significant delays, then the completed property may have cost more to build than what it’s now worth.
2. Short-Term
Any short-term investment will carry a higher level of risk than a long-term one. Since a construction home loan has significantly shorter terms (compared to a 30-year mortgage), the higher rates can help offset the risks.
3. Variable Costs
There’s always the possibility that labour and material costs may fluctuate over the course of a 6-12 month construction project. This variability is factored into the costs charged by the lender.
4. No Collateral
Unlike a traditional home loan, a construction project lacks the necessary collateral to cover the cost of the loan. If you were to default on your loan, the lender wouldn’t be able to recoup costs by selling the property “as is”.
5. Added Administration Costs
When you have a construction loan it creates a lot more admin work for the lender (since funds are continuously being disbursed). The lender will include these added costs when determining your interest rate.
So, should you be wary of construction finance products because they come with higher interest rates? Generally, no.
Despite having higher interest rates, a construction finance arrangement still comes with a great range of benefits. For example, with a construction loan, you’ll gain interest-only repayments, only be charged interest on funds once they’re released and you’ll have the option of converting to a traditional mortgage upon completion (with a more competitive interest rate).
Overall, the benefits of a construction loan will go a long way towards offsetting the short-term impact of being charged higher rates. If you’re planning a large-scale construction project, they can be the ideal finance solution.
What Is the Typical Payment Schedule for a Construction Loan?
A typical payment schedule for construction financing will include 6 distinct payment drawdowns, including:
Deposit
Before construction starts, you’ll usually provide the builder with an initial deposit. This is generally 5% of the loan total.
Slab/Foundations
Once the concrete slab or house foundations are complete the builder will invoice for the foundation’s payment. This should be around 15% of the project total.
Frame
This stage includes the completion of the internal wall frames, support structures, electrical and plumbing conduits and insulation, and will usually be about 20%.
Lock-up
This is once the site can be “locked up” and the windows, doors, external walls and roofing are completed. The lock-up stage will be another 20%.
Fittings
Invoiced once the internal fittings and fixtures have been installed. This may include lights, power points and other electrical and plumbing fixtures. This will be approximately 30% of your total funds.
Completion
Once the final cosmetic details are completed and the site has been cleared of leftover materials or building rubbish, you’ll be invoiced for the final 10%.
What can you use a construction loan for?
Building a New Home
Renovating a Property
Knock-down and Rebuild
Developing a Property
Commercial Construction
Completing an Extension
What is the best loan structure for construction loans?
The below are the most common loan structures for construction loans that you can select based to fit your personal circumstances best:
Progress Payments
Your lender will release funds to you at different stages of the construction process, such as when the foundation is poured or when the roof is installed. This will help you ensure that you have the funds you need to complete each stage of the build.
Interest-Only Payments
With an interest-only loan structure, you’ll only be required to make payments on the interest accrued during the construction period (making payments more manageable). Once completed, the loan will typically convert to a standard principal and interest home loan.
Receiving a Line of Credit
A line of credit loan structure allows you to draw down the necessary funds as you need them. A line of credit can be useful if your proposed construction project is more complex or if you’re working with a custom builder who requires more flexible financing arrangements.
Construction to Permanent
Your loan will start out as a standard construction loan with funds progressively released during the building phase of the project. The loan will then automatically convert to a permanent home loan (with an extended loan term) once construction is complete.
How Can You Efficiently Draw Down a Loan for Construction?
Efficiently drawing down a loan for construction requires careful planning and good communication with your lender. Here are some tips to help you streamline the process:
Create a Detailed Budget and Timeline
Have a comprehensive budget and timeline for your project written out in detail. Determine all estimated costs, including materials, labour, permits and fees, as well as a realistic timeline for each stage of the construction process.
Work With an Experienced Builder
An experienced and reputable builder can help you stay on track and within budget. They can also help you avoid costly mistakes or unnecessary delays. Your lender may also require you to work with an approved builder or contractor.
Work With an Experienced Builder
An experienced and reputable builder can help you stay on track and within budget. They can also help you avoid costly mistakes or unnecessary delays. Your lender may also require you to work with an approved builder or contractor.
Have Good Communication With Your Lender
Throughout the construction process, keep your lender informed of your progress and any changes to your budget or timeline. This can help ensure that your loan funds are released in a timely and efficient manner (so work can continue unhindered).
Submit All Required Documentation Promptly
Your lender will likely require specific documentation at various stages of the construction process, such as building plans, invoices and proof of insurance. Make sure you submit these documents promptly to avoid delays in the loan drawdown process.
Manage Your Cash Flow
Proper management of your cash flow includes ensuring that you have adequate funds on hand to cover any unexpected expenses or delays, as well as managing your loan drawdowns to ensure the completion of each stage of the project.
How Do You Apply for a Construction Loan?
Getting the right advice before undertaking a construction project will ensure you get the best loan to suit your needs. With the help of a broker, you’ll have a clear understanding of all the loan details (even the fine print!) and you can get an accurate timeframe for your project finance.
Talk to one of our brokers today to help set your construction project on the right path.
How Can SCF Solutions Help With Your Construction Financing?
At Sunshine Coast Financial Solutions, we specialise in helping our clients obtain the financing they need to build or renovate their dream home or commercial property. With our industry expertise and personalised approach, we make the construction loan process simple and stress-free, so you can focus on your construction project.
Get The Right Loan For Your Needs
We take the time to understand your unique circumstances and financial goals, so we can recommend loan products that suit your specific needs and preferences.
Assistance With Your Application
Our decades of industry experience allow us to provide expert advice, guidance and assistance with paperwork. This means we can take care of the details for you.
Wide Panel of Lenders & Products
We can give you access to a great range of loan products and competitive rates — whether you’re a first-time homebuyer, property investor or business owner.
FAQs on Construction Loan
A construction loan is ideal for funding major renovations, such as a complete revamp of the internal layout, updating kitchens and bathrooms or a proposed extension. If you’re planning a smaller renovation (such as a simple cosmetic upgrade), then there may be other finance arrangements better suited to your needs. For tailored advice, contact the team at SCF Solutions.
It’s also important to note that these loans are designed to cover the cost of construction works only, not the purchase of the property or land. So, if you’re renovating a property that you already own, you’ll need to have equity in the property or be willing to use other assets as collateral to secure a construction loan. Construction finance for renovations is subject to similar lending criteria as loans for new builds, which may include detailed building plans, council approval and regular progress inspections by the lender.
Generally, no. With a construction loan, you only pay interest on the amount of money you have drawn down to date. This means that as you draw down more funds to pay for construction costs, your interest payments will increase.
Once your project is complete and your home is ready to move in, your construction loan will typically convert to a regular home loan, and you’ll start making regular principal and interest mortgage repayments.
Generally, they’ll have a loan term of six to 12 months, although some lenders may offer terms of up to 24 months. Once construction is complete, the loan will usually convert to a regular home loan with a term of up to 30 years.
Standard construction home loans are typically only available when a borrower is using a licensed builder. However, you may be eligible for an owner-builder loan instead. Owner-builder loans are similar in structure to a standard construction loan, but they’re designed for individuals who are building their own homes and who will be responsible for the construction process themselves.
Owner-builder loans can be more difficult to obtain since an owner-builder is taking on a greater level of responsibility. As an owner-builder, you’ll be in charge of obtaining permits, hiring subcontractors and overseeing the entire construction process. Because of this, lenders often require additional documentation and approvals.
Yes, most lenders will require an initial deposit, which can range from 10% to 20% of the total loan amount.
You’ll generally need a credit score of at least 680 to qualify for a construction loan, although some lenders may require higher scores. You’ll also need to show that you have an acceptable deposit, a stable income and the ability to make minimum repayments on your loan.
Prior to loan approval, you’ll need to provide detailed plans and specifications for your construction project, including cost estimates and timelines. If you’re working with a builder, they’ll need to have a track record of completing similar projects successfully. You’ll likely also need to get an appraisal to determine the value of the property once construction is complete, as well as sufficient insurance to protect your property during construction and after completion.
Typically, the loan is disbursed in predetermined stages as the construction project progresses. The lender will inspect the work at each stage and release funds as each milestone is completed.
Some lenders may require you to use a builder that is approved by the lender, while others may allow you to use your preferred contractor.
The approval process for construction finance can vary and can take several weeks or longer. To ensure your loan application is processed as soon as possible, it’s a good idea to consult with a broker.
