What You Need to Know About Construction Loans

Building Or Undertaking Major Renovations On Your Home?

Or are you an Aussie expat looking to build or renovate your existing property in Australia? A construction loan might be just what you need. Unlike standard loans, construction loans allow you to pay for each stage of the build without needing all the funds upfront.

How Construction Loans Work In Australia

Construction loans, also known as building loans, are designed for individuals who are either building a new home or making significant structural changes, like adding a room or changing the roof, to an existing home. These loans offer flexibility by allowing you to draw down progress payments throughout the build or renovation.

A Mortgage With Draw Down Progress Payments

A significant feature of construction loans is the ability to draw down your loan in instalments during the construction process. This means you’ll receive the loan amount in stages rather than as a lump sum. Typically, these stages include the deposit, foundation works, framework, lock-up, fixing (plumbing and electrical), and completion.

This staged payment approach means you only draw down the amount needed to pay your builder and contractors as they complete each stage. Consequently, you are only charged interest on the amount drawn down, not the total loan amount. The principal loan amount does not need to be repaid until after construction is complete, which can help manage cash flow throughout the project.

Fixed Price Contract Australian Home Builds

Construction loans are generally based on a fixed price contract, whether you’re building on new land or renovating an existing property. This contract means there’s limited room for change once the building or renovations are underway.

Typically, the loan is interest-only during the construction period and transitions to principal and interest payments once the project is completed. You may be able to negotiate to extend the interest-only term, so it’s worth discussing this with your lender if it appeals to you.

If changes are needed during the build, discuss these with your lender as they can affect forecast costs. It’s wise to account for potential changes when applying for the loan, as variations are common in construction and renovation projects.

How to Apply For An Australian Property Construction Loan

To apply for a construction loan, you’ll need to provide your lender with council-approved building plans and a fixed price building contract from a registered builder. Usually, a deposit of 10%-20% of the total cost is required, and if your deposit is less than 20%, you might need to pay Lenders Mortgage Insurance.

Having a licensed builder increases your chances of loan approval, though you can apply as an owner-builder, which involves more paperwork and a longer process. A valuer may visit during construction to ensure the project is on track. Based on their report, the lender will continue payments or address any issues.

Be aware of key dates, such as when the build must be completed (Eg: within 24 months from the first drawdown). Keep your lender informed of any delays to discuss timeline adjustments.

Once construction or renovations are complete, you’ll need to provide final paperwork, such as the builder’s final invoice, building insurance policy, and certificate of occupancy.

Navigating the building and renovating process can be stressful, but we at Specialist Mortgage are here to help. Contact us today to learn how we can assist you with securing a construction loan, or any Australian home, and guide you through the process to make your dream home a reality.