How to Deconstruct a Construction Loan: What You Need to Know

What is a construction loan?

In the market to build a new home rather than buy an existing one? Let us take you through how to deconstruct a construction loan! Congratulations, it’s an exciting time. Plus, if you’re a first home buyer, you may be eligible for the First Home Owner Grant (FHOG) government incentive which can potentially save you $10,000 or $20,000 in regional areas. Building your own home literally from the ground up is an enjoyable journey but buyers should be aware that it is a process that is inherently different from purchasing an established property. While there are obvious factors specific to building that need to be considered such as landscaping, fencing, and driveways, it’s also important to keep in mind that the finance you will need to build a house is different in comparison to a traditional home loan that you would need to purchase an existing home.

Construction loans V Traditional home loans 

A home loan for an established property is a lump-sum that is released by a bank as a closing payment once the house settles. But when you’re building a home yourself, you’ll need to explore and apply for a construction loan well before you build, as a construction loan is systematic and allows your finance to be paid in stages as the build progresses. With each construction phase of the building process—such as the base, frame, lock-up and fixing stage—your lender will pay the builder an instalment of the total construction loan. Your builder may refer to these instalments as ‘progress payments’ or ‘drawdown payments’. In a nutshell, it means you’re drawing down on your loan (or increasing your loan’s balance towards the approved limit) to pay for each part of the build. Construction loans may also require plans, permits and a fixed-price building contract to be approved for finance – making it essential to engage an experienced mortgage broker early in the process. In fact, with the introduction of Comprehensive Credit Reporting (CCR), you’ll need to make sure your finances are in order at least six months before you even intend to apply for a construction loan.

Benefits of construction loans

Just like the wide variety of options available for buyers in choosing the right builder or floorplan, construction loans also offer plenty of choices for consumers and their individual financial needs. If the house you’re building is not your first home and you’ll need to sell your current house to pay for your new property, talk to one of Inovayt’s experts about a construction loan as part of a relocation loan. These loans, sometimes referred to as a ‘bridging loan’, allow you to settle on your purchase before you sell your current property, making the transition to your new home seamless, while also eliminating the hassle of moving to a new house twice. Our team can help you consider whether finding a lender who offers this type of construction loan will be of benefit to your situation. Keep in mind there are a variety of construction loans available and a wide variety of lenders to choose from who may offer different choices – for example, some lenders may inspect each building phase before releasing a progress payment.

Constuction loan mortgage broker

Regardless of which construction loan you choose, it’s essential that you do your research well before you apply. With access to 48 lenders and a no-obligation consult, Inovayt can help find the right construction loan to enable you to build your dream home. Our experts are adept at handling construction loans as standard business and can provide you with clarity on how they differ to standard home loans and what you should be aware of before you apply. By engaging Inovayt for your construction loan and avoiding the need to deal directly with a bank, you’ll also simplify the loan process.  Our mortgage brokers can service the progress payments for your construction loan, rather than leaving you with the stress of having to coordinate everything on your own with your lender.

Building your first home

This extra effort and a clear understanding of the process of construction loans are just one of the benefits of using a mortgage broker. Your broker should do as much as they can to inform you and prepare you for the journey of building a home – particularly if you’re a first home buyer and entering the lending process for the first time. Should you require more information or clarity on any of these topics, please contact us today on 1300 354 355.