A construction home loan is designed for people building a home or doing major renovations instead of buying an established property. It has a different loan structure to home loans designed for people buying an existing home.
A construction loan most commonly has a 'progressive drawdown'. This means you may receive instalments of the loan amount at various stages of construction rather than receiving it all at once at the start. You generally only pay interest on the amount drawn down instead of the whole loan amount. Some lenders may also ask you to contribute to the loan from your savings or provide evidence that you will be able to afford the full loan amount. Some lenders offer construction loans that are interest-only during the construction period and then revert to a standard principal and interest loan once your home has been fully built.
Of course, a construction loan is just one potential funding source for your project. You may also be eligible for government grants and concessions, particularly if you are a first home buyer, for example. Or, for renovators, there could be the option to refinance an existing mortgage or take out a personal loan. But, again, it could be a wise idea to seek professional financial advice when considering your options.
As one of Australia's most awarded non-bank lenders, Mortgage House has a range of loan and mortgage finance options, whatever your property goals. We proudly focus on providing all our customers with the loan, product and service outcomes tailored to their exact needs. So when you decide to buy a block of land and build a home, Mortgage House has a range of options available to you. One of the most popular home loans available to those who build a house is a construction home loan.
A construction home loan is similar to a traditional loan. Interest rates don't work any differently, with both fixed-rate loans and variable rate options, and the fees are also likely to work the same way. But there is one significant feature that makes construction home loans attractive if you're planning to build a house. A construction home loan allows you to stagger the payments to your builder once agreed development stages have been met. This is important because you will only be charged interest on the amount you have paid out, a feature that can save you money. Once your home has been built, the loan will revert to a standard variable home loan. A construction home loan is available to owner-builders – those who build a home on their block of land – or a registered builder. When you're working out whether a construction home loan is suitable for you, there is a range of variables to consider, including:
- Funds will be paid to you in drawdowns ensuring you only pay interest on the portion of the mortgage you have used.
- Option to make interest-only payments for the land portion before and during the construction process.
- You have up to 24 months to complete construction after the land settlement, giving you the chance to plan things out.
- The loan may be split between two accounts after construction to identify personal and investment debt.
- The maximum loan-to-value ratio will be 50% if you're an owner-builder.
- Funds are released only at predetermined stages after proof of work has been established.
- There can be several terms and conditions, including having council-approved plans and a fixed price tender at the time of application.
That last point is one worth remembering. With regular loans, you may be able to secure pre-approval for your home loan based on the likely amount you will pay for a home. However, construction loans can come with a few more terms and conditions. None of them is arduous, but they are worth noting. The main one to note is that when you apply for a construction loan, the bank or lender will want to see you already have plans that the local council has approved, and you have a fixed-price contract for your new property. It is always good to demand a fixed-price contract when building a home. Not only can it help you with your construction loan application, but it can also ensure there are no hidden costs and overruns as you get further into the build.
The process for being approved for a construction home loan doesn't differ that much from a standard home loan. Like regular mortgages, there are two main types of home loans:
- Owner-occupier home loan. An owner-occupier home loan is a mortgage for those who intend to live in the property they are looking to buy. In the case of a construction loan, an owner-occupier mortgage is for those who aim to build a house on a block of land and live in the property or have it as their main place of residence.
- Investor home loan. An investor home loan is a mortgage for those who want to build a home for investment purposes. The aim is to rent the property out and then sell oi for a profit at a later date. Interest rates for investment home loans, including construction loans, will be higher than comparative owner-occupier home loans.
As mentioned earlier on this page, the main difference between applying for a regular mortgage and a construction home loan is the handful of terms and conditions that most banks and lenders will demand. The main two are that you already have council-approved plans to build a home on your block of land and a fixed-price contract for the build.
When you apply for a construction home loan or any other type of mortgage, there are a few things you will need to get ready in advance. At Mortgage House, we were hoping you could benefit from our decades of experience finding suitable home loans for Australian families, including those who decide to build a home on a block of land. So we have developed an easy-to-understand checklist to help streamline the application process for you. That checklist covers things such as:
- Proof of ID. Banks and lenders will want you to prove you are who you say you are so that you will need ids such as a driver's licence, proof-of-age card, a boat licence or other relevant ID. Suppose you only have one form of photo ID. In that case, you will also need to supply a secondary form, such as a birth certificate, citizenship certificate, pensioner card, Medicare card or utility bill.
- Income. Proving your income can be simple when looking for a home loan to build a house. Ideally, it is always good to supply the bank or lender with your past two payslips or a letter from your employer outlining how long you have worked there, your gross and net income, and whether you work any regular overtime or receive any regular allowances. If you are self-employed, your last two income tax statements are always preferred, and having your latest tax assessment notice can also be important.
- Expenses. This one is pretty clear. Banks or lenders will need as much detail as possible about your expenses, everything from the weekly shopping bill to school fees, utilities and how much you spend on takeaway.
- Assets. Bank statements for the previous three months, the details of any shares or superannuation and proof of the value of your car or home contents is the kind of things banks and lenders look for when it comes to your assets.
- Liabilities. If you have a current mortgage, you will need to provide a minimum of 3 months of loan statements. You will also need to provide the most up to date statements for your car or personal loans and credit cards or store cards.
FAQs About Getting A Home Construction Loan
Once a construction loan has been approved, and the property is being built, lenders will generally make progress payments throughout the various stages of construction. Progress payments will typically be paid directly to the builder after each stage, and the borrower will then need to pay the money back to the lender, along with interest and any fees that may apply. According to major lenders Westpac and Commonwealth Bank, Some of the typical stages or milestones at which a lender may make progress payments under a construction loan include:
Slab Down, Foundations Or Base
This is an amount to help you lay the foundation of your property. It can cover the levelling of the ground, as well as the plumbing and waterproofing of your foundation.
This is an amount to help you build the frame of your property. It can cover partial brickwork, roofing, trusses and windows, and insulation.
This is an amount to help you put up the external walls and put in lockable external windows and doors (hence the term 'lockup' to make sure your house is lockable).
Fitout Or Fixing
This is an amount to help you install your property's internal fittings and fixtures. It can cover plasterboards, the part-installation of cupboards and benches, plumbing, electricity and gutters.
This is an amount for finalising contracted items (such as final payments for builders and equipment), as well as any finishing touches such as fencing, painting and overall cleaning.
As most construction loans are progressively drawn down, interest at any given time is normally calculated based only on the funds used up to that point. So, for example, if by the third progress payment only $150,000 has been drawn down on a $300,000 loan, interest would only be charged on $150,000, minus however much the borrower had already paid back.
When you build a house and are searching for a construction loan, interest rates are likely to be at the forefront of your mind. When it comes to interest rates, Australian banks and lenders have two types of home loans on offer:
The interest rates of a variable rate loan can increase or decrease over the life of your loan, based on a range of internal and external factors. Interest rates of variable rate loans are likely to be lower than a comparative fixed-rate loan.
A fixed-rate loan means your interest rates will be fixed for an agreed period, usually up to 5 years. That means your monthly repayments will stay the same over the agreed fixed period, making budgeting easier.
A good way to compare home loans when searching for acceptable interest rates is to understand how comparison rates work. Comparison rates take into account fees and give you an indication of how one home loan compares to another. When you build a house, details can be everything from choosing the block to choosing the façade to the intricate interior options. And details of construction mortgages are also important. Having an idea of what the repayments can be over the life of the loan, including how much of it might be interesting, is an important detail of building your dream home. Our mortgage calculators can do that for you. While they are only a guide, they can give you a good indication of how much your repayments may be at the current interest rate level or if you have a variable loan and the rate increases. They can also help you compare repayments of different loans, work out how much you might be able to borrow, and even how much stamp duty you may pay. This can allow you to plan for the future with a lot of information at your fingertips.
Building a home is a complex process that involves multiple parties, including builders, contractors, lenders, solicitors, accountants, quantity surveyors and the council. With so many people involved in the process, there's always the possibility of a communication breakdown, and things may go wrong. For example, getting approved for a building loan is half the battle, with most mortgage brokers and bank employees not understanding the process.
Accept The Reality And Set Your Expectations.
Each lender processes a loan in a particular manner. With a conventional loan, it's often easy to have the loan submitted and approved promptly. Unfortunately, this system is often poorly-designed for a construction loan and run by inexperienced staff within the banks. Loan documents are commonly lost, and credit officers often lack communication skills, leading to misunderstandings and delays. Our job as your mortgage broker is to fix these issues as they arise and, where possible, prevent them from occurring in the first place. No matter which lender you apply with, you'll need to have some patience. As a result, construction loans are often set up with many errors. The loan amount may be incorrect, or it may be delayed due to constant amendments.
How Do You Request That The Bank Pay Your Builder Directly?
- The builder will send you an invoice.
- You'll then complete and sign a drawdown request form (available from your lender).
- Send the drawdown request form and the invoice to the construction department of your lender.
- The lender may require a valuation to confirm the work that has been completed so far.
- The funds will be advanced to your builder generally within five working days.
- Repeat this process for each progress payment required by the builder.
How Big Of A Deposit Do I Need?
Most people go over budget. We recommend that you keep saving during the construction process and avoid large expenses until the construction is complete. We try to ensure that you get approval for a slightly higher loan amount as a general rule. This is to ensure that there are plenty of funds available. There's nothing worse than running out of funds when your house is almost complete!
If you're borrowing 100% of the cost of land and construction with a family pledge home loan (guarantor loan), then you'll still need some funds on standby to allow the builder to create the building contract and apply for council approval. The lender can't release funds outside of the specified construction drawdowns.
Additional Work Completed By Contractors
In some cases, your builder isn't completing part of the work. Some common examples are:
- Swimming pool
- Power pole / power connection
- Site clearing
- Shed, dam or other hobby farm improvements
If you can provide a formal written quote for this work, we can often get the bank to extend the loan for these costs. It depends on the nature of the work and the lender that we're working with as to whether this will be possible or not. The key is to give us this information at the beginning of the process. If you tell us about the additional work, we can't get the lender to finance it later on. Be careful as some lenders will only release money for the additional work once the main house is completed. This may not suit your construction schedule, so, in some cases, we need to change to another lender.
Many lenders only finance the construction of homes built by licensed builders. Lenders may be hesitant to accept applications for owner-builder loans, as they use the property as security against your mortgage. The value of this security may be less certain if the builder is not licensed. This means if you're building the property yourself and you aren't a licensed builder, lenders may consider you to be a higher risk.