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What Is A Construction Loan?

A construction loan is secured by the property being built and paid back in stages as the construction work is completed.

To be eligible for a construction loan in Australia, borrowers typically need to meet certain requirements, such as having a good credit score, a stable income, and a deposit. It is also usually necessary to provide detailed plans and specifications for the construction project, as well as a budget and timeline for completing the work.

Check out this step-by-step building guide for more information.

How Do Construction 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 the cost of construction or the on-completion value.

If you’re building an investment property, some will even consider future rental income which can greatly improve your borrowing power.

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 and drawdown schedule.

6 Construction Loan Tips

Building a home is a complex process that involves multiple parties including builders, contractors, lenders, solicitors, accountants, quantity surveyors and the council.

With so many people involved in the process, there’s always the possibility of a communications breakdown and things may go wrong.

Getting approved for a building loan is half the battle with the majority of mortgage brokers and bank employees not understanding the process.

We’ve outlined some tips on how you can get approved for your construction loan to minimise the delays that might occur.

Tip 1: Ask Your Bank To 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.

Check out the stages of construction page for more information.

Tip 2: Ensure Each Stage Is Complete Before Completing Drawdown Requests

At each stage of the build, it’s recommended that you have a walkthrough to ensure that the property is being built to specifications and to quality.

You may want to consider hiring a building consultant so you can be sure that no corners have been cut.

This is particularly at the practical completion stage or last drawdown: don’t sign off on the last drawdown until you’re satisfied.

Tip 3: Accept The Reality And Set Your Expectations

Each lender processes a loan in a particular manner. With a conventional loan, it’s often easy to have the loan submitted and approved in a timely manner.

For a construction loan, this system is often poorly-designed and run by inexperienced staff within the banks.

Loan documents are commonly lost and credit officers often lack communication skills, leading to misunderstandings and delays.

No matter which lender you apply with, you’ll need to have some patience!

As a result, construction loans are often set-up with many errors. The loan amount may be incorrect or it may be delayed, due to constant amendments.

Home Loan Experts’ job as your mortgage broker is to fix these issues as they arise and, where possible, prevent them from occurring in the first place.

Tip 4: Do Not Make 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, the lender may need to reassess the loan all over again?

This can add a 6-week delay to your construction and you may also be charged a premium by the builder!

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

• Make sure that the building contract you provide the lender with is the final complete contract.
• If you 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 any large changes, you’ll 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.

Tip 5: Include Other Minor Quotes

It’s quite common for people to hire contractors to complete other work such as landscaping, utility connections, swimming pools or site works.

Try and get all of these minor quotes included in the 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!

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