A Construction Loan is a specific type of mortgage designed for people wanting to build a new home or complete major renovations. Home construction loans aren’t set up in quite the same way as a regular mortgage in the beginning. Do you need new construction loans?
Instead, the lender considers the total amount you need to borrow in order to pay your builder. Then breaks down the full amount into separate payments called progress payments. These are percentages of the total building contract amount paid out of your mortgage funds to the builder throughout the construction process. There are usually five progress payments paid to your builder after each key building stage is completed. As an example, when building a new house using a construction loan, the five Progress Payments may looks like similar to below –
- Foundations/footings. This stage also includes site cutting and preparation, as well as running initial plumbing into trenches before pouring the slab;
- Frame and brickwork. This stage includes the first fix framing of the house, plus brickwork and roofing, as well as first fix electrical fittings;
- Lock Up. This stage includes installing windows and doors, along with gyprock or wall linings and any insulation if it’s required. The home is lockable at this point;
- Second Fix. So the second fix stage sees the gyprock flushed ready for painting, kitchen benches and cupboards installed, tiling started to wet areas, second fix plumbing done, second fix electrical work done, architraves, skirtings and cornices fitted and guttering, downpipes and eaves completed;
- Practical completion. The final stage of construction usually includes painting the home inside and out. Adding those finishing touches, such as installing shower screens and walk-in robes.
While progress Payments are being made, the majority of lenders will only expect you to pay the interest due on the amounts that have been drawn. In most cases the lender will let you pay interest only on the construction loan. Until construction is complete as in most cases the borrower may be renting, as well as building at the same time. So cash flow management is important during this time. Your full principal and interest payments won’t begin until after the handover has taken place. You have received the keys to your new home.
Who Needs a Home Construction Loans?
A construction loan is set up differently to a regular mortgage to include progress payments in stages to your builder, so if you intend to build a new home you do need one.
It’s important to do some homework to be sure you have the right construction loan to suit your needs. Every lender has different policies and processors in regards to how they structure your construction Loan so you need an expert Mortgage Broker to ensure you are set up with the correct product from day one.
New construction loans are suitable for any borrower intending to build a new home on a vacant block of land. This includes buying a house and land package from a licensed builder, or conducting major renovations to an existing home, such as adding new rooms.
Property developers for small scale developments may also use new construction loans. But these might only be available if you’re building under a certain number of properties. If you’re building a larger amount of properties (usually over four) most lenders will consider this to be larger-scale development, which will require commercial finance instead.