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.
What is a construction home loan?
A construction home loan is a type of home loan designed for people who are building a home as opposed to buying an established property. It has a different loan structure to home loans designed for people buying an existing home.
A construction loan most commonly has a progressive drawn-down. That is, you draw down the loan (or increase your borrowing) as needed to pay for the construction progress payments.
The amount available to borrow will be partly based on the value of the property upon completion of the construction.
A construction loan will usually be interest only over the first 12 months and then revert to a standard principal and interest loan.
How do construction loans work?
Once a construction loan has been approved and the construction of the property is underway, lenders will make progress payments throughout the stages of construction.
Generally, the payments will be made at upon completion of five stages:
(1) Slab down or base: This is an amount to help you lay the foundation of your property. It covers the levelling of the ground, as well as the plumbing and waterproofing of your foundation.
(2) Frame stage: This is an amount to help you build the frame of your property. It covers partial brickwork, the roofing, trusses, and windows.
(3) Lockup: This is an amount to help you put up the external walls, and put in windows and doors (hence the term ‘lockup’, to make sure your house is lockable).
(4) Fitout or fixing: This is an amount to help you do the internal fittings and fixtures of your property. It covers plasterboards, the part-installation of cupboards and benches, plumbing, electricity, and gutters.
(5) Completion: This is an amount for the conclusion of contracted items (e.g. builders, equipment), as well as any finishing touches such as plumbing, electricity, and overall cleaning.