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Construction Loan

WHAT IS A CONSTRUCTION LOAN?

When doing a major renovation or building a new home, your finance needs are different to buying an established property. A construction loan is a specialised lending option for builders or renovators to help them through the process. These can be construction loans or home loans that have a construction facility.

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HOW DO CONSTRUCTION LOANS WORK?

Onstruction Loans Work

When you apply for a loan, the lender will need a copy of the building contract/tender and the plans. They’ll ask their valuer to estimate the on-completion value of the property and will assess your loan on the lesser of the land price plus cost of construction or the on-completion value.

Once your loan has been approved, the lender will issue a loan offer for you to sign and return, just like with any other home loan. When your builder is ready to begin receiving payments from the bank he’ll need to provide additional documents, such as the final council approved plans, his insurance & drawdown schedule.

How do you request that the bank pay your builder directly?

  • The builder will send you an invoice.
  • You’ll then complete and sign a drawdown request form (available from your lender).
  • Send the drawdown request form and the invoice to the construction department of your lender.
  • The lender may require a valuation to confirm the work that has been completed so far.
  • The funds will be advanced to your builder generally within five working days.
  • Repeat this process for each progress payment required by the builder.
Advantages Of Construction Loan
ADVANTAGES OF CONSTRUCTION LOAN
By making progress payments instead of giving the builder a lump sum up front, borrowers and their lenders can make sure that builders or contractors aren’t being paid for work that hasn’t been done, or done properly.
Lower repayments. Your loan is interest only during the construction period, helping your cash flow while the work’s being carried out which is useful if you’re also having to rent somewhere else!
Less interest. You’re only charged interest on the amount drawn down and not the fully approved loan amount, saving you money during the construction period.
Disadvantages Of Construction Loan
DISADVANTAGES OF CONSTRUCTION LOAN
The lender will want to see council approved building plans and a fixed price building contract before they approve a loan, so there’s still a bit of work and expense needed before you get approval.
Higher rate. The interest rate on a construction loan can be higher than the rate charged on normal home loans, though typically this reverts back to the standard rate once construction’s completed.
Loan to value ratios (LVR) are typically higher on construction loans, especially if you’re an owner builder and managing the work yourself, so you may need a chunky deposit.
Available funds. You may only be able to pay contractors once the lender is satisfied with the progress.

You may wish to consider getting a small line of credit to pay urgent bills, which you can then pay down when you receive the progress payment from your lender.

There are a broad range of construction loans on the market, including Aussie’s new Aussie Optimizer Construction Loan.

Other Ways To Pay For A Renovation

OTHER WAYS TO PAY FOR A RENOVATION

If you’re knocking down and rebuilding, a construction loan may be the way to go. But if you’re just renovating, there are other borrowing options such as extending your current mortgage, securing a line of credit loan, mortgage redraw, releasing home equity, refinancing or even a renovation personal loan (if the work isn’t structural).

At A1 LoanHub we can help you understand the various options available and work out which one suits your requirements. If you love the comfort of having experts help you work out how to pay for it why not get in touch with our friendly team who are just a phone call away?






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