A construction home loan is a type of mortgage specifically designed for individuals building a home rather than purchasing an existing property. Its structure differs from standard home loans meant for buying established homes.
How Does It Work?
Construction loans typically feature a progressive draw-down mechanism. This means you draw down the loan, or increase your borrowing, as needed to pay for construction progress payments. The loan amount you can borrow is partially based on the property's estimated value upon completion of the construction.
During the first 12 months, a construction loan is usually interest-only and then transitions to a standard principal and interest loan. Once approved and construction begins, lenders make progress payments at various construction stages.
Payments are generally made upon completion of the following five stages:
- Slab Down or Base: Covers the foundation, ground leveling, plumbing, and waterproofing.
- Frame Stage: Covers the building frame, partial brickwork, roofing, trusses, and windows.
- Lockup: Covers the external walls, windows, and doors, making the house lockable.
- Fitout or Fixing: Covers internal fittings and fixtures, including plasterboards, cupboards, benches, plumbing, electricity, and gutters.
- Completion: Covers the final contracted items like builders and equipment, as well as finishing touches such as plumbing, electricity, and cleaning.
Application Process of a Construction Loan:
- Document Preparation and Application: Similar to other home loans, applicants need to provide personal identification and pay slips. Additional required documents include council-approved plans and specifications, a signed and dated building contract, and the builder's civil construction and work injury insurance.
- Bank Approval: The bank reviews the documents and sends an appraiser to evaluate the property based on the construction contract.
- Loan Settlement: Before making progress payments, the loan applicant must provide a withdrawal application and receipt to the bank. The bank then pays the builder once requirements are met.
Advantages of a Construction Loan:
- Stamp Duty Savings: Stamp duty is calculated on the value of the land alone, excluding the house itself. For existing homes, stamp duty is calculated on the entire property value.
- Flexibility: Offers more options and flexibility in construction.
- Negotiable Dates: The starting and completion dates can be discussed with the builder.
- Progress Payments: Allows the borrower to pay interest only for each specific stage of construction.
