If you are looking to build your new home rather than buy an existing property, you need a different type of home loan known as a construction loan.
Home Construction Finance
A construction loan can also suit you if you are making major renovations to your existing home or to a property you have bought but which needs a bit, or a lot, of work before you call it home. At Mortgage Excellence, we assist our clients to get the right construction loan for your situation – as some banks impose more hurdles than others.
A construction loan will usually be interest-only over the first 12 months, or the term of construction and then revert to a standard principal and interest loan. The amount available to borrow will be in part based on the value of the property upon completion of the construction.
Briefly, this is how it works:
- You buy the vacant land first and then arrange to build on this land in an agreed timeframe. The lender will lend you up to 80% of the completed value, and in many cases consider up to 95% of the completed value.
- Throughout the construction the lender releases funds enabling you to pay the builder at various stages to completion.
Point one speaks for itself, so let’s take a closer look at point two.
With a construction loan, the lender considers the total amount required to pay the builder to complete construction. This amount is then broken down into ‘progress draws’; separate payments that come out of your mortgage fund and are made at each phase of the building process to the builder. It is common that the lender will only require you to pay interest due on the amounts drawn. Let’s use this construction loan example to demonstrate.
If your loan is for $300,000 and your first invoice is for $55,000, the interest will be calculated on your account balance of $55,000 as well as fees. Full principal and interest payments begin once the house is completed and you are in your home deciding on the curtains.
It is interesting to note that while the majority of construction loans are given to people building or renovating their own home, small scale developers can also get in on the action. The caveat here is that no more than four properties on a block of land may be built. Any more than this and the developer will require a Property Development Construction Loan, and these come at a more expensive commercial interest rate.
When you’re purchasing the land, we at Mortgage Excellence, suggest that our clients have their solicitor include a finance clause. By adding a finance clause you can protect yourself from potential disaster. The finance clause is to:
- Protects you against unsuitable finance;
- Allows you to negate your contractual obligation if finance is not approved;
- Removes land from the market while you wait for financial approval;
- Gives you time to obtain finance.
The Stages of Construction
When planning with your builder, the contract should include a clear outline of the stages of building and when these stages will be completed. There are usually five stages:
- Frame and Brickwork
- Lock Up
- Second Fix
If you wish to discuss your individual situation please contact Greg direct for a discussion regarding your options and strategy.
Greg thanks for your assistance in helping Tracy and I obtain the funding for our building project. Prior to meeting you we had spent months with 3 separate brokers who promised the world and delivered nothing. We were unable to achieve any results. After meeting with you, you had a thorough grasp of what we needed. You looked at the deal from a completely different angle.
Due to your persistence and diligence we were able find the funding for our deal. You and your team have handled our business with honesty and integrity. We really appreciated your help.
Ron and Tracy Lucas Allambie
Mortgage Excellence is the Best Choice for Home Loan Advice!
If you wish to discuss your individual situation please contact Greg direct for a discussion. Mortgage Excellence is here to serve you!