Building Your Dream Home: A Guide to Construction Loans
Construction loans are a specialised form of finance for those building a new home or undertaking major renovations. Unlike a standard home loan where funds are provided in a single lump sum, a construction loan releases money in stages to pay the builder as work progresses.
The primary advantage of this structure is the significant interest saving during the build period. Borrowers are only charged interest on the funds that have been drawn down, rather than the total approved loan amount from day one.
Example:
If a client is approved for a $500,000 construction loan, they will only pay interest on the initial drawdown for the slab (e.g., $100,000) until the next stage is complete and the next payment is made.
The release of funds follows a "progress payment schedule" outlined in the fixed-price building contract.
Your builder completes a stage of construction according to the contract schedule and provides an invoice for that stage.
You provide the builder's invoice to the lender, requesting the next progress payment drawdown.
The lender arranges for a progress inspection or valuation to verify that the work for that stage has been completed to standard.
Once the inspection is approved, the lender releases the funds directly to the builder for that completed stage.
If you are contributing your own funds towards the build, lenders almost always require these funds to be used in full before any portion of the loan is drawn down.
The construction process is typically broken down into five key stages, with payments released as each milestone is completed.
The site is cleared, levelled, and prepared. Foundations and the concrete slab are poured, including initial under-slab plumbing.
The "skeleton" of the house is constructed, including the internal and external wall frames and roof trusses.
The property is made secure and weatherproof. This involves installing external walls, windows, doors, and roofing.
The internal work is completed. This includes plastering walls, installing fixtures and fittings like cupboards and benches, and completing plumbing and electrical "rough-ins".
The final touches are applied, such as painting, tiling, flooring installation, and fitting of electrical and plumbing fixtures. A final inspection is conducted before the final payment is made.
Let's discuss your construction project and find the right finance solution. With over 17 years of experience, we'll guide you through every stage of your build.