Loans to build your dream
Buying the perfect block of land and building your dream home on it can prove confusing when the subject of funding arises. What comes first? A loan for the land, then a separate loan for the home? How do you pay a deposit, part-payment to builders etc?
This dilemma is the very reason a Construction Loan was created. Basically a Construction Loan is a standard home loan that features a progressive draw-down facility where you receive the total loan amount in predetermined installments, based on your construction schedule. Because the exercise is done in stages - paying a deposit or paying in full for the land, commissioning a builder who requires payments at certain stages such as laying a concrete slab, roofing the frame etc - lenders have tailored a home loan to suit.
For instance, you might want the first progressive draw-down of, say, $200,000 to purchase the land. When you are ready to build, you may want a second draw-down of $20,000 to lay the foundations, followed by further draw-downs to suit the building stages.
Instead of making one full withdrawal from your lender to finance a property, a construction loan gives the borrower access to funds in small, lump sums at various intervals to suit building stages. Interest is only charged on the total amount of finance drawn down at any given time during the term of the loan.
What makes a construction loan so special?Financing a property development with a normal mortgage would be impossible for the simple reason that the lender does not have enough security on the property. Building on a block of land increases the value of the property and lenders then may be able to offer you more. During the construction stages, your lender may re-value the property to ensure they have enough security to cover their worst-case scenario: you default on your loan. Typically, building insurance is a requirement set by your lender for a construction loan.
Points to considerAs with any loan there are specific questions you need to check off with your lender. There may be some costs involved when making a progressive draw-down. Normally, lenders offer a number of free draw-downs but you may be liable for extra cost if you exceed this limit. Think about your own personal requirements and choose a loan to fit with that. There is a wide variance in the marketplace - at RateCity we note some products offering an unlimited amount of draw-downs while others charge fees of up to $240 per draw-down. Other fees to be aware of are valuation fees. Over 61% of loans indicate that the lender will require valuations on the property for each of the draw-downs. You may be liable for extra costs, as the valuation fee is normally passed on by the lender to the borrower. When building a house the length of construction period can become an issue. It is important to check with your lender how they deal with the unexpected - such as rain delay in construction. Some lenders will still allow you to continue drawing-down funds but others will cap the period of time allowed before you must take the full amount of the loan.
Where to start shopping?It's not difficult to find a construction loan, as it is very similar to a normal mortgage. Most lenders have this construction feature with their variable rate loan. In fact, over 71% of variable rate loans are available as construction loans. There are 429 variable rate home loans available in Australia and 307 of them offer construction loan features.
How do I compare mortgages?RateCity is the best website to shop around on for over 2000 home loans and most other financial products. At RateCity, you can use expert comparative data from CANSTAR CANNEX, Australia's leading financial research and ratings firm. CANSTAR CANNEX has analysed and evaluated hundreds of products to award five stars to only the very best. The CANSTAR CANNEX star ratings go much further than just looking at interest rates. They also take into account important features so you can be confident you are getting the best product.
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