Table of Contents
- Construction loan calculator
- What is a construction loan?
- What is the construction loan process?
- What happens at the completion of each stage?
- How big of a deposit do I need?
- How do valuations work with construction loans?
- What documents does the valuer need?
- Construction loan interest rates
- Which lenders do construction loans?
- What are the requirements to get a construction loan?
- Can I use the equity in my land for a construction loan?
- Can I get a construction loan if I have bad credit?
- How does interest only work during construction?
- Two loans or one?
What is a construction loan?
A construction loan is a home loan used to fund building a house. You can either use a construction loan to buy land and build, or to build on land you already own.
Construction loans have different requirements to regular home loans.
Regular home loans paid in full at settlement. This makes sense when you are buying a house which is already built. On settlement, you pay the vendor the full amount for the house and in exchange, you receive the keys and the title.
With a construction loan, you pay the builder in stages.
What is the construction loan process?
Stage 1: Loan approval
The lender has approved the construction loan. The lender is comfortable with the expected valuation for the completed project. The lender has a copy of all necessary insurances. Examples include builders insurance & public liability insurance. The lender has a copy of the signed fixed price building contract and council approved plans.
Stage 2: Site preparation / Deposit
The site is soil tested. If needed, the site is levelled and cleared.
The deposit required by the builder usually cannot exceed 10% of the project value.
Stage 3: Base
The concrete slab or footings and brickwork is complete.
Stage 4: Frame
The house frame is complete and approved by the building surveyor / inspector.
Stage 5: Lock-up
The windows, doors, brickwork & insulation are complete. The house is now lockable.
Stage 6: Fixing
The plastering, kitchen, bathroom, toilet, laundry, heating/cooling, plumbing, electrical & painting are complete.
Stage 7: Completion
Site clean-up, landscaping and fencing are complete.
What happens at the completion of each stage?
The builder will provide an invoice for the completed stage.
The borrower will need to use their contribution (deposit) for the project first. After the client contribution has used, the lender will cover the progress payments.
For example, let’s say Patrick has settled building a house on a block of land he owns.
The total fixed price building contract is $250,000.
To fund the building, Patrick has a 20% deposit of $50,000 and is using a construction loan for the remaining $200,000.
The builder has completed the base stage and has give Patrick an invoice for $25,000.
Patrick has already paid $25,000 as a 10% deposit to the builder.
Q: Does Patrick pay the $25,000 invoice for the base stage from his own funds, or from the money he has borrowed from the bank?
A: The bank requires Patrick to use his funds for the project first. Patrick needs to pay the base stage invoice of $25,000 from his own funds.
Q: At the completion of the next stage, the Frame stage, does Patrick have to pay with his own funds?
A: No. He has already paid $50,000 (being the 20% contribution he agreed to pay toward the building project). So, his lender will pay the frame stage invoice.
What construction loan deposit do I need?
Using a registered builder requires less of a deposit than when building as an owner builder.
With a fixed price building contract, the minimum required deposit for some lenders is 10%. A 10% deposit corresponds to an LVR of 90%.
If building as an owner builder, a 50% deposit is usually required. A 50% deposit corresponds to an LVR of 50%.
It’s better to have a buffer in place to cover any unexpected costs during construction. Having a buffer in place can increase the chance the loan will be approved.
Variations can add to the cost of the project. Variations can either be requested by the client, or offered as extras by the builder.
How do valuations work with construction loans?
Lenders get an “as if completed” valuation before any construction work begins to estimate:
- The market value of the land
- The building contract is to industry standards (for example the Housing Industry Association or Master Builders Association)
- The fixed price building contract stages are within acceptable industry standards
- The expected value of the completed dwelling
What documents does the valuer need?
- A copy of the signed fixed price building contract
- A schedule which includes the specifications and proposed finishes
- Formal plans with dimensions and measurements
Lenders require a valuation to be completed before they formally approve a construction loan and at completion. Some lenders also need valuations at each stage of construction.
Construction loan interest rates
Q: Do lenders charge higher interest rates for construction loans?
A: Generally no. Some lenders charge small fees at each progress payment. Any progress payment fee or valuation fee will be disclosed to you before you apply for the loan. Your broker will go through these details with you at the start. So you can choose a construction home loan which meets your needs.
Which lenders do construction loans?
What are the requirements to get a construction loan?
- Full copy of signed contract of sale
- Copies of plans and specifications
- Copy of signed fixed price building contract
- Quotes for any proposed variations
- Copy of insurances required (this can vary depending on the lender)
Can I use the equity in my land for a construction loan?
For example, say someone owns land outright worth $200,000. They want to build a house for $250,000. The land could be used as security for the loan and the equity would count towards the deposit.
Can I get a construction loan if I have bad credit?
It depends what’s on your credit file. If you have either paid or unpaid defaults above $1,000 each, it will be more difficult to get a construction loan.
How does interest only work during construction?
Most lenders offer construction loans as interest only during the construction phase. This helps reduce the mortgage repayments, while the owners may still be renting.
Some lenders will allow principal and interest payments during the construction phase.
Two loans or one?
Some lenders offer to do the land loan first and then the construction loan later. Two loans are useful when someone needs to buy the land now, but isn’t ready to builder straight away. They may still need to research which builder they’re going to use and what the final house design is going to be.
If there will be two loans, the lender will want to make sure the borrower can handle the total project.
After the land has been purchased, the builder & contracts are ready, your mortgage broker will organise an increase to the land loan to cover the cost of construction.