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What is a Construction Loan?

A Construction Loan is for people who are building a new home, or planning major renovations to your existing home.

The difference between a construction loan and a standard home loan is that instead of a lump sum payment at agreement signoff, the loan is usually drawn down in stages. Payments (or draw downs) coincide with the initial purchase of the land followed by a number of key construction stages.

There are typically five loan stages

1 Pre approval for your land and house purchase

2 Land purchase and formal approval for your land settlement

3 Builder selection and formal loan approval for the construction portion of your loan

4 Construction commencement and loan drawdown

5 Construction completion and switch to P & I home loan(if applicable)

In each case the loan funds are drawn down in stages as the builder reaches agreed construction milestones. The lender uses an independent expert to monitor the construction process and only makes progress payments when the builder has reached certain objectives and met satisfactory standards.

Most lenders only require interest payments on the loan during the construction phase. For instance, if you have borrowed $250,000 for a house and land package, but have only drawn down $100,000 to pay for the land, you only pay interest on the $100,000 not the full amount.

After completion the loan then reverts to the product of choice.

A construction loan helps to minimise your mortgage repayments until your new home is completed, takes control over payments to the builder, and reverts to a normal loan on completion.

A construction loan will require more documentation than a standard home purchase. A example of the documentation required for the approval process is as below but may vary from lender to lender.

Documents required for unconditional approval on construction loans

1- Standard Building Plans and Specifications

2- Builders Tender or Contract signed by Builder

3- Plan of Subdivision (to enable valuation)

Documents required for settlement: -

1 - Fully Signed and Completed Building Contract required before drawdown of construction loan.

Builder’s contracts must include the following minimum requirements:-

1- Driveways from the footpath to the front of the dwelling

2- Flooring that is carpet or boards tiling or vinyl