Building new, or substantially renovating?
If you are building or substantially renovating your home, you may need to apply for a construction loan. This type of loan is different from a standard home loan. A construction loan covers the cost of building or substantially renovating your home. The loan is released in stages which will align to the stages in your building contract. Generally the loan repayments will be interest only during the building process and convert to a principle and interest loan after the building is completed.
Get everything together
When you apply for any home loan, the lender will ask you to provide information about your income, assets and debts. However, if you apply for a construction loan, the lender will also ask you for information about what you intend to build. For example, you may need to provide:
- Approved plans for the construction
- A fixed price contract from the builder
- A detailed list of fixtures and fittings
- Any other council approvals that are required to complete the build.
Smaller renovations may not need a construction loan
If you are not making major structural changes to your existing home, you may not need a construction loan. You may be able to borrow against the equity that you have built up in your home to fund the costs of the renovations. Before you start however, you should check with your lender whether they allow the renovations that you are planning.
What’s it worth?
The lender will organise for a valuer to review your plans and inclusions and provide an ‘as if complete’ valuation. This is what they estimate your property will be worth once it’s finished. They take into account the value of the land, plus the amount that you are paying the builder. They look at completed properties in the area to determine the final value. The lender will then advise how much you are able to borrow based on this valuation. It’s important not to over-capitalise on your home, so the valuation can help you to negotiate a price with the builder.
Are you an owner-builder?
If you are an owner-builder, you will need to provide additional documents to the ones we’ve noted above. These include copies of council certified approved plans, permits, licenses for construction works, full construction costs, timing schedules, invoices, and insurance policies. You may not be able to borrow as much as an owner-builder as you would if you were contracting to a builder under a fixed price contract. Some lenders, for example, may only lend you a maximum of 60% of the ‘as if complete’ valuation. So you should consider carefully your financial position if you are going down this route.
Knock-down rebuild
If you have a home that you want to knock down, with a view to building a brand new home, you need to contact your current lender prior to starting any building work. The lender will want to know what you are building and may wish to restructure your loan to suit the construction process.
You may also find that your current lender does not provide construction loans – in which case you will have to refinance your current loan and apply for the construction loan. You can do this at the same time.
Check that your house insurance is valid during the building process, particularly if you are living in part of the house. You may need a separate policy to cover the building works.
House and land package
A house and land package is usually available through major developers, who purchase the land when it is initially released by the Government. They may offer a specific house for the block, or they may allow you to choose from a range of home designs. You generally have to use their preferred builder.
Getting a loan for a house and land package usually consists of two steps: buying the land then building the house. The loans can be arranged separately, but are usually bundled together.
You can buy the land using a standard home loan contract. This loan will settle first. You will also apply for a construction loan to fund the cost of the build.
If you are buying a house and land package through a developer they may require you to pay a deposit based on the total cost of the land and the construction. However, you may only have to pay stamp duty based on the value of the land (excluding the value of the house).
Building on vacant land
You can purchase vacant land with a view to building a house in the future. Again, you will need to have 2 loans – a land loan and a construction loan similar to the house and land package noted above. But you have more flexibility in that you can choose the builder. Most lenders will require you to have a fixed price building contract to secure the loan.
Progress payments
With a standard home loan, the lender will provide a lump sum, which is used to purchase or refinance a property. Your repayments are calculated based on the interest rate, the amount and the term of the loan.
However, with a construction loan, the lender releases the loan amount in stages that correspond to the stages outlined in the building contract. These are called progress payments. This aims to ensure that the builder is paid for the work they have completed. Your repayments are based only on the amount that has been drawn down.
The stages can be different depending on the lending, but they are generally:
(1) Deposit – this is paid after settlement of the land (if applicable) or upon signing up the builder. It is paid before construction begins. Generally you will have to use your deposit or equity to pay for this stage.
(2) Slab or base stage: This stage is paid after the foundation slab has been completed.
(3) Frame stage: This is paid after the exterior frame or walls are in place. It covers partial brickwork, the roofing, trusses, and windows.
(4) Lockup: This stage is paid after the roof, external doors and windows are in place. It generally signifies that the building can be locked up and is secure.
(5) Fitout or fixing: This is paid after the internal fittings and fixtures of your property are in place, including plasterboard, cupboards and benches, plumbing, electricity, and gutters.
(6) Completion: This is an amount for the conclusion of the contracted build. It also includes any finishing touches such as plumbing, electricity, and overall cleaning.
The lender will arrange for a valuer to check that the building works have been completed before the first progress payment is made and before the last payment has been paid. This check protects you in the event that the builder has issued an invoice without actually completing the works.
Your lender may also set aside a small percentage of each invoice until several months after the construction has been completed to allow for any problems with the building works. The final amount is paid after any repairs have been completed to your satisfaction.
The loan process
The process for getting a construction loan is a little different to a standard loan. So give Milestone Lending a call today.
