A construction home loan is a type of home loan designed for people who are building a home as opposed to buying an established property. It has a different loan structure to home loans designed for people buying an existing home.
How does it work?
A construction loan most commonly has a progressive drawn-down. That is, you draw down the loan (or increase your borrowing) as needed to pay for the construction progress payments. The amount available to borrow will be partly based on the value of the property upon completion of the construction.
A construction loan will usually be interest only over the first 12 months and then revert to a standard principal and interest loan. Once a construction loan has been approved and the construction of the property is underway, lenders will make progress payments throughout the stages of construction.
Generally, the payments will be made at upon completion of five stages:
(1) Slab down or base: This is an amount to help you lay the foundation of your property. It covers the levelling off the ground, as well as the plumbing and waterproofing of your foundation.
(2) Frame stage: This is an amount to help you build the frame of your property. It covers partial brickwork, the roofing, trusses, and windows.
(3) Lockup: This is an amount to help you put up the external walls and put in windows and doors (hence the term ‘lockup’, to make sure your house is lockable).
(4) Fitout or fixing: This is an amount to help you do the internal fittings and fixtures of your property. It covers plasterboards, the part-installation of cupboards and benches, plumbing, electricity, and gutters.
(5) Completion: This is an amount for the conclusion of contracted items (e.g. builders, equipment), as well as any finishing touches such as plumbing, electricity, and overall cleaning.
Application process of a construction loan
1. Documents preparation and application Same as other home loans, to apply for a construction loan, applicant should provide personal identification documents and pay slip. In addition, to apply for a construction loan, you must provide following related documents: – Council approved plans and specifications – Signed & dated building contract – Builder’s civil construction insurance and work injury insurance
2. Bank approval Bank reviews documents after the application. Meanwhile, bank will send an appraiser to evaluate the property basing on the construction contract.
3. Loans settled Before progress payment is made, loan applicant should provide withdrawal application and receipt to the bank. The bank will pay the builder once requirements are met.
Advantages of construction loan
1. To save stamp duty. Stamp duty is calculated on the value of land for housing construction. House itself is not included in stamp duty calculation. While for an existing home, stamp duty is calculated on property value.
2. More options and more flexible.
3. Starting date and completion date can be discussed with builder.
4. Progress payment allows the borrower to pay interest for each specific stage.