Crunch Finance Article

Construction Home Loans & understanding everything about them

Whether you’re revitalizing a weathered bungalow or embarking on the realization of the grand home you’ve envisioned for years, we’ve got you covered with…

We run through everything you need to know about Construction Home Loans, how they work and what you need to consider.

Whether you’re revitalizing a weathered bungalow or embarking on the realization of the grand home you’ve envisioned for years, we’ve got you covered with our specialised construction home loans, also known as building loans. Tailored for registered builders, these loans boast flexible conditions designed to accommodate the cashflow challenges inherent in significant projects.

Our construction loan operates similarly to a standard home loan, but with additional building conditions that set it apart. Let’s break down the distinction by comparing two loans—one standard and one construction—both valued at $500,000.

In the case of a standard home loan, devoid of specific building conditions, you are required to draw down the entire loan amount of $500,000 within a specified timeframe. This implies that you start paying interest on the entire loan amount right from the outset.

Now, consider a construction loan of $500,000. With this approach, you draw down the funds you need in installments, aligning with the costs associated with each phase of the project. For instance, if your initial invoice from the builder amounts to $50,000, you draw down precisely that amount, and subsequently, pay interest solely on that sum. Interest on the remaining amount is incurred only when you draw it down at a later stage in the project.

It’s crucial to note that in addition to the project-related funds, you’ll also incur loan interest on any fees and charges debited to your loan account throughout the construction process.


Construction Home Loans Unveiling Flexibility

Undertaking the construction or renovation of your suburban haven can be a daunting task. A robust project plan, allowing for contingencies, and a organised team are essential. A project manager, akin to a kindly tyrant armed with a stick, can prove invaluable in navigating the complexities of the process.

Financially, you won’t require the entire sum upfront. What you need is a home loan with specialised construction conditions—enter our construction home loans. These loans empower you to draw down your loan in instalments or chunks. While various banks may term these as ‘progressive drawdowns’ or ‘progress payments,’ the concept remains the same—individual payments drawn at different stages from a pre-agreed loan amount.

The notable advantage is that you only pay interest on the funds you utilize. To further ease the financial burden, our construction home loans offer interest-only repayment options during the construction period.

 

Your Construction Team

Your team comprises builders, architects, and possibly a project manager, alongside plumbers, electricians, and an array of sub-contractors. A cohesive and tight-knit team is imperative, demanding meticulous planning, flexibility, and, above all, effective communication.

Consider us part of your team. If you opt for construction home loans with us, we’ll assign a dedicated broker. They’ll collaborate with you on matters related to your loan, notably progressive drawdowns and loan repayments. Should your circumstances change during the construction phase, prompt communication with us is encouraged.


The Stages of Construction

A typical construction project encompasses several stages:

  1. Preparation: Includes plans, permits, connection fees, and insurance.
  2. Base: Involves the construction of the concrete slab, footings, pad, and base brickwork.
  3. Frame: Signifies the completion and approval of the house frame.
  4. Lock-up: Encompasses the completion of windows, doors, roofing, exterior, and insulation.
  5. Fixing: Involves the installation of kitchen cupboards, appliances, bathroom fixtures, plumbing, and electrics, with plastering and painting of the home.
  6. Completion: Marks the finalization of fences, site tidying, and the disbursement of the builders’ last payment.

How to Secure Construction Home Loans

Once you’ve selected a registered builder, your broker will request a suite of documents from you, including council plans, permits, insurance provisions, and a copy of your fixed-price contract with a Progressive Payment Schedule.

Pending the orderly submission of documentation and your compliance with standard lending criteria, we’ll approve your construction home loans. It’s crucial to note that each progressive drawdown entails further conditions.


Valuation Requirements for Construction Home Loans

Before commencement, we require an ‘as if complete’ valuation—an estimate of the market value of the land and proposed building/renovation. This ensures the loan amount aligns with the realistic cost of the project. Additionally, we scrutinise the quoted cost of construction, evaluating plans, specifications, and a signed fixed-price contract that meets industry standards.


Insurance Imperatives for Construction Home Loans

To initiate any drawdowns with our construction home loans, you must secure the following insurances:

  1. Builder’s All Risk Insurance: Covers risks to the building during construction.
  2. Domestic/Home Warranty Insurance: Mandatory for projects involving a registered builder, covering risks such as non-completion, structural defects, and builder negligence.
  3. Public Liability Insurance: Protects against risks like property damage and personal injury.

You’re now poised to embark on your construction journey with our specialized construction home loans! However, there’s a bit more groundwork to cover, such as obtaining approval for your building plans and the issuance of a relevant building permit before we finalize the loan.

What is a Progressive Drawdown?
Curious about progressive drawdown? Now that you’re familiar with construction loans and how they ease the cashflow challenges of substantial projects, let’s delve into the concept of progressive drawdown. This approach allows you to access your construction loan incrementally, addressing your financial needs step by step—commonly referred to as ‘progressive drawdown.’ Not only does this method provide flexibility, but it also leads to lower interest payments compared to borrowing the entire amount upfront. Each progressive drawdown, also known as a progress payment, represents a portion of your loan funds released at specific stages of the construction process.

As the project unfolds and meets our stipulated requirements, we directly pay your builder at each stage. This involves a thorough review of the builder’s invoices and the submission of a progress claim certificate, among other necessary documentation.

 

Talk with us about your New Build!

Navigating the construction home loans process may seem intricate, given the uniqueness of each project. Our specialist bankers stand ready to assist you with any aspect of this loan process. While they may not advise on your bathroom design, their extensive knowledge of construction home loans is at your disposal.
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