Construction loan tips

What can possibly go wrong?

Building a home is a complex process which brings together many experts including builders, lenders, solicitors, accountants, quantity surveyors and the council. Because of this complexity and because most of the experts do not understand each others field it is very easy for things to go wrong.

The majority of mortgage brokers and bank employees do not understand construction at all! As a result construction loans are often setup with many errors, with the incorrect amount or are delayed due to constant amendments. We have created this guide to help you ensure that your loan doesn’t have these same frustrations.

Your expectations

Every lender has a system that they follow to take a loan application from when it is first submitted to when the loan is drawn down. For a construction loan this system is often poorly designed and run by inexperienced staff. Please be aware that no matter which lender we use there will always be documents that get lost, misunderstandings and delays as a result of this.

Our job as your mortgage broker is to fix these problems as they arise.

How does the construction process work?

When you apply for your loan the lender will need a copy of the building contract or tender and the plans. They will 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 is 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 will need to provide additional documents such as the final council approved plans, his insurance & drawdown schedule.

How do you make a request to your bank for them to pay your builder?

• The builder will send you an invoice.
• You will 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.

Changes to the building contract

Did you know that if you make an amendment with the builder and the contract price changes by just $100 that the lender may need to reassess the loan all over again? This is because of a variety of reasons as a result of the way lenders fund their loans.

So how can you avoid changes causing a problem with your home loan?

• Make sure the building contract is the final complete contract at the time you provide it to the lender.
• If you do make any small changes then try to pay for them from your own funds or have the builder reimburse you for any discounts after construction is complete.
• For large changes you will need to notify the bank and then allow up to one month for the bank to reassess your loan.
• “Keep it simple” works very well with the banks! If you keep making changes then expect to have significant delays.

Other minor quotes

It is quite common for people to hire contractors to complete other work such as landscaping, utility connections, swimming pools or site works. Ideally try to get all of these minor quotes included in building contract and then have the builder pay for them. This may not work for the builder, so discuss this with us and your builder before deciding on the best way to go.

Sometimes the banks will only release funds for other quotes on completion of construction. Be careful because you may have agreed to pay the contractor up front!

One loan or two?

If you are buying the land then consider splitting the loan into a “land loan” and “construction loan” so that they can be advanced at different times. If this is not done then you will need to put all of your required funds in at the time the land settles and any LMI will be charged at land settlement.

We will discuss this with the lender to confirm their process and when they require you to contribute your deposit.

How big a deposit do I need?

You will almost certainly go over budget! We recommend that you keep saving during the construction process and try to avoid any large expenses until construction is complete.

As a general rule we try to approve a slightly higher loan amount than the amount required to ensure that there are plenty of funds available. There is nothing worse than running out of funds when your house is almost complete.

Are you paying cash?

If your builder is being paid cash for their work then no lender can approve a construction loan for you. They can approve a loan based on the current value of your property however that is it. We recommend that you always sign a formal contract with your builder, ensure they have the correct insurances in place and follow all relevant state and federal legislation.

First Home Owners Grant

The First Home Owners Grant (FHOG) is paid to the lender by the government when the first drawdown is made to the builder. As a result of this many people borrowing a high percentage of the property value do not have enough funds to settle on the purchase of the land but do have enough to complete the project!

Each state & territory has their own incentives for people building homes and for first home buyers. We recommend that you contact your state government to confirm which incentives you may be eligible for.

We will always complete a “funds to complete calculation” for the land and for the total project to make sure you have enough money to complete both stages.

Guarantor loans

The combination of a guarantor home loan with a construction loan is a particularly difficult situation. Most lenders systems simply cannot handle this combination and as a result there are delays and errors. Please discuss this with us as we have a couple of lenders that can accept this type of loan.

We are construction loan experts!

Our mortgage brokers are experts in construction loans. We can quickly work out which lenders can approve your loan and in addition to this we can structure your loan in such a way that your new home can be built without the hassles.

Please enquire online to speak to one of our mortgage brokers.