Constructing a new home can be a great way to maximise the returns on a property you own or capture the upside on a vacant block of land you have bought. Having said that, building a new home has its complications, and our goal is to make the process as simple and hassle free as possible. We can also help you substantially renovate your home, where you need to finance structural renovations like knocking down walls or extending your home.
What is a construction loan?
A construction loan is a loan 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.
What is a progress payment?
A progress payment refers to each payment you make to your builder according to a fixed price building contract. This means your loan is funded in stages.
What supporting documents do I need for a construction loan?
In addition to the standard supporting documents, you will need the following for pre-approval:
- Builder’s tender, including any variations
- Specifications & schedule of finishes
- Proposed plans to council
- Proposed out of contract Items e.g. landscaping, pool
To obtain formal approval, you will need:
- Fixed price building contract
- Council approved plans
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.
What is a fixed price building contract?
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.
Can I obtain finance with a cost-plus contract?
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.
Can I get a construction loan as an owner builder?
Yes, with some banks, you can get a construction loan as an Owner Builder. Some key requirements are:
- Preparation of an Owner Builder Independent Advisers report
- Evidence that you have sufficient funds to complete the build prior to formal approval – funding in advance is not available
- A clear financial benefit for completing the project as an Owner Builder vs using a Licensed Builder
- Demonstration of your experience and background to successfully complete an Owner Builder project.
Because there are fewer banks that can accept Owner Builders, these requirements must be diligently met for the bank to approve your loan.
What happens if I need to buy the land first?
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.
Can I use a separate bank to purchase the land and then fund the construction?
No, you cannot use separate 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.
Can I obtain a construction loan as a property investor?
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.
What is the maximum loan to value ratio (LVR) for a construction loan?
Normal lending policy applies for construction LVRs. This means the standard is 80% LVR, and above this, Lenders Mortgage Insurance (LMI) will apply.
Are there any additional costs to obtaining a construction loan?
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.