What is construction loan?
A construction loan is a loan that you apply for to do construction on a brand-new House or do major structural renovation to your existing home. Ideally construction loans are used for new House & Land package purchases, whereby you apply for a land loan to settle the land and a construction loan to build the home. Construction loans normally are released by lenders directly to the builder on progress payments based on periodical invoices during the construction process. Your interest charges on the loan starts from first periodical drawdown and keeps increasing as each progress payments are made. At the handover stage of construction, the loan is then drawn in full.
The stage payments vary state by state, but generally goes for a five-stage process as below:
- Deposit – 5% (paid by you to builder at contract signing stage)
- Slab – 10%
- Frame – 15%
- Lock-up – 35%
- Fixing – 25%
- Completion / Handover – 10%
The above percentage can vary builder to builder as long it meets industry and lender requirements.
How do I apply for a construction loan?
Loan magnet helps you step by step throughout the application process and will guide you how to apply for this complicated loan type. Some lenders have different criteria for construction loans, so we need to make sure all criteria are met before applying for such a loan.
Step by Step Guide to apply for a construction loan
1. Apply for a House & Land combined pre-approval
To apply for a House & Land pre-approval, we need the necessary documents related to income, savings history, conduct on current loans, security post code of the desired purchase and so forth. Then we apply for a pre-approval whereby the bank checks all records, looks at your funding position and then come up with an approval noting your borrowing capacity and conditions.
2. Land & Building Contracts
The next step of the process is to obtain a full land contract from the land developer and a construction contract from a registered builder. The land contract needs to have the full plan of subdivision attached, so that lender can identify the specific off the plan block of land you are purchasing. A construction contract needs to be an industry standard contract e.g., HIA or Masters Builder Association approved contracts. The construction contract needs to have full house citing, engineering and elevation drawings, so that the valuer can come up with an ‘As If Complete’ valuation.
3. Obtaining Unconditional Approval for your Loan
Once full valuation is completed, then the lender will issue a full formal approval of the loan. Then we proceed to loan documents signup and become ready for land to settle.
4. Land Settlement
At land settlement, lender will do a partial drawdown on the approved loan for funds required to settle on the land. At that stage your repayment will start just on the land portion of funds advanced to you at settlement.
5. Commencement of construction
At the start of construction, after the slab is poured, you will receive an invoice from the builder. You have to forward the invoice along with all building permits and builder insurance documents to the lender. Lender will then directly fund the builder. You will then start paying interest on that portion of the funds advanced. This process continues for the rest of the construction process till the final drawdown is done at handover stage.
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