A construction loan is one set up for the purpose of building a new home or substantially renovating an existing home where structural renovations are required. A construction loan is drawn down in stages called progress payments.
A progress payment refers to each payment made to your builder according to a fixed price building contract. This means your loan is funded in stages.
In addition to the standard supporting documents, you will need for pre-approval:
To obtain formal approval, you will need
There are some additional documents you will need prior to funding of your construction loan. We will advise of these as we take you through the approval process.
A fixed price building contract is a standard form contract which sets out the stages by which your property will be built, and the percentage of the total cost payable at each stage. It is set out according to the Housing Industry Association’s (HIA) template, and is a requirement by banks to obtain Formal Approval.
A fixed price building contract ensures you do not pay more than what the contract states for the building of your home, and the builder will absorb any cost overruns. This gives more certainty to the bank as to what your house will cost to build, and hence is preferred to cost-plus contracts.
Cost-plus contracts are where you pay exactly what it costs for the construction of your home plus a pre-negotiated percentage markup. This means you will absorb any cost overruns. Banks generally do not accept cost-plus contracts, and if they do you can expect a substantially lower LVR.
The alternative to financing a cost-plus contract is to borrow against the equity of an existing property. However, you will need to make sure you have enough funds to comfortably complete your build.
Yes, there are some banks that can provide a construction loan as an owner builder. Some key requirements are:
Because there are fewer banks that can accept Owner Builders, these requirements must be diligently met for the bank to approve your loan.
If you are building a new home on a newly purchased site, you will need to purchase and finance the land first. This means there are two loan applications, one for the land and another for the construction once you have the relevant paperwork ready.
No, you cannot use seperate banks to finance a land loan and then a construction loan. The only way you can do this is if you borrow against another property to 100% finance the land OR 100% finance the construction.
Yes, you can use a construction loan to finance and build an investment property. We have many clients who opt for this strategy to save on stamp duty, and attempt to capture a capital gain by taking on the risk of the construction process.
Normal lending policy applies for construction LVR’s. This means the standard is 80% LVR, and above this, Lenders Mortgage Insurance (LMI) will apply.
A construction loan may incur additional valuation costs as valuations may be needed during the construction process, to make sure the property is on track, and that it is built according to your fixed price contract once complete
There is additional work to manage a construction loan and process each progress payment, so an additional fee is charged at each progress payment.