What is a construction loan?
How are they different from an existing home loan?
What do you need to apply for a construction loan?
Other things you might like to know?
How exciting you are heading down the road to building your own home, you can decide exactly how you want it, right down to the last toilet roll holder.
What is a construction loan?
Essentially it is a home loan that allows you to build a house on a piece of land.
How is a construction loan different from an existing home loan?
Embarking on building looks different from buying an existing home from a home loan perspective. When you are building your home loan may be split into two parts. One part for purchasing the land and one part for building the home. This is because there are usually two different settlement dates for your purchase, one settlement for the land and one for the build itself.
Often your application (for land and construction) will run simultaneously but as two separate loans. Most lenders will require that you start building on your land within two years of purchase, this DOES NOT mean that your house needs to be completed within two years, only that the building starts within two years of purchasing the land.
When it comes to the construction of your home, the loan itself will usually be drawn down in parts. The work will be completed by the builders and then you will be invoiced by the builders – letting you know the work that was completed and what needs to be paid.
This process will depend on the builder or housing company you choose to work with.
However once invoiced, assuming you are happy with the work that has been completed you will then submit the invoice along with an authority from you to the bank, instructing the bank to pay the builder. If you are doing major construction the bank may ask to value the property with each drawdown, this will ensure that you have enough funds to complete the build. Once all parties are satisfied with this then the bank will pay the builder.
What will you need to apply for a construction loan?
You will need all of the normal things to get your application together (see our What I need to apply for a loan post)
BUT YOU WILL ALSO NEED (dun dun dun)
- A fixed price contract, from your builder
- Consent from the council
- Plans for your amazing new home
- A copy of the builders liability insurance
Don’t panic, I know it seems like a lot of paperwork – but we are here to help you!
Other things you might need to know.
If your intention is to purchase the land and not build on it for a long time then the purchase of the land is considered land banking and you will be required to put down a higher deposit for the land itself.
Repayments of your loan may look different for you. The repayments for the purchase of your land will start after the settlement of the purchase of the land. As for the construction part of the loan this will vary depending on what phase of the build you are at. Since the loan is drawn down in parts as your build becomes nearer to completion then the repayments will increase.
If you’re still thinking about building your own home, reach out, we are here to help you. It can be a daunting prospect when it’s all laid out like this, but don’t let that take away from the fact that it can be so very rewarding creating your own home for your family from the foundations to the toilet roll holder!
While we’re home loan experts, our blog posts are for general information purposes only and are not intended as financial advice. If at any stage you need personalised advice, get in touch on 06 8788 4444 or Ben or Mark.
