construction-loans

Construction Loans in Australia Explained [4 Massive Mistakes]

If there’s one thing you can expect when building your dream home from the ground up, it’s for things to go wrong every now and then, especially when it comes to the financial side of things. Unlike acquiring a standard mortgage to purchase a pre-built property, building your own home involves taking out a construction loan.

Unlike a traditional mortgage, construction loans across Western Australia and other states provide funds incrementally during construction, and borrowers only pay interest on the funds they draw down. Once construction is complete, the loan either becomes a standard mortgage, must be paid off or refinanced.

Naturally, stepping outside the standard mortgage application can be confusing to new borrowers. Over the years, Capta Financial has helped many borrowers across WA, QLD and VIC find the right construction loan, understanding their unique requirements and features. Let’s explore some of the biggest mistakes we see clients make when using construction loans and explain how you can avoid them.

Table of Contents

Why do Construction Loans have a Different process than standard mortgages?

Banks changed their methodology regarding the acceptance of applications for construction loans. People found themselves in an unprecedented situation, one unlike anything they had ever seen before. It was only through trial and error that people were able to learn how to crack the code. One thing to take note of with construction loans is that lenders will usually analyse the same factors as any other loan, but you do need to make sure that you have a good broker, as they will be able to help you navigate the process a little easier.

Given the unique circumstances of building a home from scratch, lenders offer a unique loan solution. When you think about it, lenders offering construction loans are funding a property that doesn’t yet exist, which ultimately carries higher risk. As these kinds of loans can be a liability to lenders, they opt to release the funds in stages, aligning with construction milestones.

Borrowers then only pay interest on the amount released. For example, if you took out a $400,000 construction loan and only drew $150,000 for your build, you will be charged interest on that $150,000. Once the build is complete, the loan then reverts to a standard mortgage, where you will begin making principal and interest payments.

This phased approach allows lenders to monitor the project’s progress and financial stability, ensuring funds are used appropriately and the final property value justifies the investment.

The experienced team at Capta Financial has a deep understanding of construction loans across Queensland, Australia and other states, so we can give you the upper hand in finding the perfect loan for your financial circumstances.

Tell the valuers what they need to know to get a great result

Since there is no existing property to work with, obtaining a valuation to supply to the lender for your construction loan is slightly different. Valuations for Queensland construction loans and the rest of Australia are typically based on the “land only” and “upon-completion” value of the property. This means the valuation assesses the land’s worth and the property’s value once the construction is completed.

To ensure a seamless process and to maximise the result of your valuation, we recommend providing detailed plans and high-quality specifications to the valuer. The more detailed your plans, the easier it is for the valuer to accurately assess the potential value. Without your vision, the valuer will be going in blind and may struggle to provide an accurate valuation of your future property.

Having a clear and realistic budget for your construction is also wise, as over-capitalising, or spending more than what the market values the property, can lead to a lower return on investment.

Don’t rush anything

If you have made the decision to build a brand-new home, then you need to avoid rushing any steps in the process. Slow down, take your time when making big decisions and don’t feel pressured. If you can do this, then you’ll soon find that it is easier than ever for you to keep a cool head and to avoid rash and poorly thought-out choices. This is especially important when choosing the right Victoria construction loan, as, like any loan, you will be responsible for managing it for several years.

Now, you may be thinking that when you buy land, you need to be as fast as possible. Sellers in Australia generally want the process to be completed as soon as possible, usually 30 days from the date of the contract. It’s your job to change this. Have your settlement terms and your finance terms lined up with your construction.

In other words, instead of owning your land first and then applying for construction loan approval later, you’ll be able to get approval for both the land you want and your loan at the same time. This is difficult, as you’ll need time to give your builders the chance to prepare your fixed contract, specifications, and plans. That being said, the end result is well worth it.

Focus on essential data

While the valuers who work with the bank will have their own set of data, it’s important to provide essential data that aligns with current market conditions and your own property goals. This can demonstrate to a lender your project is designed with unique and modern market trends in mind, potentially increasing the lender’s confidence in the project’s success and value.

By effectively understanding and communicating these concepts, you provide lenders with a clearer picture of the potential value and viability of your construction project, potentially leading to a more successful and profitable loan valuation.

Take into account variations

Lastly, one issue that people have is that they rush to try and get all of their plans to the bank. They then change the plans, and they make the process take way longer than it should. In most cases, when the bank does approve your loan changes, the contract will have you paying the bill. Take it slow, finalise your plans, consider any potential variations and anticipate them. 

What’s next?

Lastly, one issue that people have is that they rush to try and get all of their plans to the bank. They then change the plans, and they make the process take way longer than it should. In most cases, when the bank does approve the changes to your construction loan in Victoria, the contract will have you paying the bill. Take it slow, finalise your plans, consider any potential variations and anticipate them.

With our Western Australia construction loans, Capta Financial gives you the support you need to ensure you never miss the crucial details, whether you’re a first-home buyer or a seasoned investor. 

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