Building a house perfectly designed for your family is a very rewarding step; However, this is also a big decision that requires lots of organizing and financial planning. And one of the very first things you can do to make this process successful rather than stressful is to look for a construction loan.
In this blog post, we will help you understand what a construction loan is, how it works, who can apply for that and what is the process of getting approved and start building your dream house.
To begin with, let’s understand the basics:
Building a house in Australia with a construction loan
What is a construction loan and how it works?
A construction loan is a type of home loan, but as the name says, it is focused on people who are building a house for the first time or doing major renovations on their own property.
It also requires an initial deposit, but the main difference from the construction loan to the home loan is that you will receive smaller amounts in different stages throughout the construction process called progressive drawdowns.
This process is typically divided into 5 or 6 stages, according to each phase of the construction, for example: The first instalment will cover the foundation of the house, which includes the levelling, plumbing, and waterproofing. Then there is the frame stage, the lockup stage – when walls and windows are placed -, the internal fitting stage, the completion, and so on.
In each of these stages, lenders might run inspections to ensure the schedule is still on track. If everything is going well, you will receive the corresponding amount to cover the building expenses of that stage. The payments are normally made straightway to your builder once each stage of the construction is completed.
During this process, construction loans have interest-only payments, which means the repayments will only cover the interests on the amount borrowed. This makes the initial repayments lower in each stage.
When all the progress payments are completed as well as the building stages, your construction loan will be replaced by the initially contracted loan, and the full repayments will finally start.
Who is eligible for a construction loan?
Any Australian citizen or permanent resident building their own house is able to apply for a construction loan, as long as the house being built is kept for personal investment or residential purposes and not for immediate sale.
Requirements and documentation will vary if you build the house yourself (owner-builder) or use a registered builder. In general, banks ask for council plans and permits, insurance provisions, building plans, building contracts, and proposed building/renovation values. Besides that, lenders also do a marketing valuation before the first and the last payment.
Our advice is for you to talk to your mortgage broker and make sure you meet the lender’s specific requirements for your case. And of course we will be more than happy if you choose Capta Financial to help in this process of getting a construction loan and building your house in Australia.