Construction loan mortgage broker
Do you need a construction loan broker to assist you to compare and obtain a construction loan?
Looking for a construction loan? Are you a developer, planning on renovating or building? Undertaking a construction can be an exciting and sometimes stressful experience. Getting your finances in order should be your first step in the process, before you start looking for land or a property to build.
Construction loans can be complex. Building is complicated enough without the complication of the financing. We can assist you to gain a construction loan that is right for you, so you can focus making your project a success.
Not all banks have construction loans and some have construction loans but don’t do them well. Depending on the lender you may get charged higher interest rates or fees on a construction loan. Many construction loans allow you to draw down you payments progressively as payments are made on completion of each stage of the building. This means that you only pay interest on the money that has been drawn. However, there can be a range of fees and charges such as drawdown fees, and lenders typically want to have the progress inspected with fees and charges associated with this. The last thing you need is a holdup with your construction because of trouble getting the bank to make progression payments. However, there are some which do not do progress inspections or charge fees drawdown fees.
After the construction phase is finished you may also be able to convert your construction loan into an ongoing home loan or investment loan.
What is a construction loan?
A construction loan is a type of mortgage for people that want to build a new property.
Construction loans aren’t set up like a normal home loan at the start. The total amount that is needed to complete the building is approved by the lender. These funds are then placed in your loan account. As progress is made on the property by the builder, the construction loan is progressively drawn down to make the progress payments to the builder. Usually you only need to pay interest on the amount of loan that has been drawn (taken out to pay the builder). Loan payments typically remain interest only during the construction phase, reverting to principal and interest after the construction is complete.
Construction loans can be used for house and land packages, they can also be used to build on vacant land that you already own.
Do I need to buy a house & land package to get a construction loan?
No, you do not need to buy a house and land package to get a construction loan. You can still use a construction loan if you have already purchased a vacant block of land (including if you used a regular loan to help you buy the vacant block of land), and then engage a builder. . It’s only when you sign a building contract with your licenced builder that you’ll need a construction loan. However, doing it this way you will have two separate home loans. You could still refinance them into one later.
Do I have to use a licensed builder to construct my home?
No, not always. Most lenders will prefer that you use a licensed builder to construct your home before they approve a construction loan for you. However, some lenders will allow you to build your own home as an Owner Builder. This is ideal if you are a qualified tradesperson or if you have a building license of your own.
What is an Owner Builder mortgage?
An owner builder mortgage is a type of construction loan where you construct the property and as an owner builder (without of having a contract with a licensed builder for the builder to build the property for you).
Owner builder mortgages are considered high risk by the lenders. This is because the property that you are going to construct is being used as the security for the loan by the lender. If you default on the loan the lender will need to recoup their costs from the repossession and sale of the property. The bank considers that as an owner builder you may not be as professional as a licensed builder
Because of the extra risk that an owner builder has, most lenders will not approve owner builder loans.
Lenders that do offer owner builder mortgages will typically limit you to a low loan to value ratio, 60% of the total vacant land value and construction cost. The completed property value is not considered in the valuation of the property for owner builders. The construction costs (quotes from trades people and for building materials) will be scrutinised to establish the costs to complete the construction as a ‘to be erected’ (TBE) valuation amount. The loan amount that you can borrow will be a proportion of the value of the vacant land and TBE valuation amount combined up to a maximum loan to value ratio.
Why should I get a construction loan?
Construction loans are specifically designed for people who are building a property. A construction loan will allow you to draw down on the funds as progress is made on the building and payments need to be made. In this way you can save money on interest costs as you are only paying interest on the funds that you have drawn down. If you are building a property some (or all) of the other home loan types will not be available to you depending on your situation.
How much can I borrow for a construction loan?
How much you can borrow is influenced by a number of factors including:
- Your income
- Your other loan repayments and commitments
- How much deposit you have
- Eligibility for any grants or rebates such as the First Home Owner Grant
It is also important that you are comfortable that you able to repay the loan without having financial difficulty, not just with today’s interest rates but even when interest rates increase as this will affect your loan repayment amount.
How much deposit do I need?
The amount of deposit you will need will depend on your situation. Depending on your situation the amount of deposit you will need could be between 5% and 20% of the total value of the combined land and completed property. Speak with an Oak Laurel mortgage broker to find out how much you will need.
Why are progress payments linked to progress inspections?
Most lenders will require that an inspection is made by the lender’s representative (to check that progress is according to the building contract) before each fund draw down and progress payment is made. These progress inspections usually require a fee. Always check with your mortgage broker if you would like to make any variations to your building contract, prior to proceeding. This will ensure that progress payments are not delayed due to the lender not knowing about or agreeing to the variations.
What are construction loan drawdowns?
In a construction loan your builder is usually paid in progress payments which occur as various stages of work are completed. Drawdowns are the funds that are taken out of the construction loan to pay for the progression payments.
Most construction loans have approximately five drawdowns.
These drawdowns are often at the following stages but may vary depending on your building contract:
Outer brickwork completed
Lock up stage
The builder will usually send you a progress invoice each time a progress payment is due. Your lender may also require you to sign a progress payment form that they will provide to you. You will need to send this form back to the lender along with the progress invoice. Once the progress payment is approved by the lender, the builder will be paid from your loan account.
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