Construction Finance
Construction Finance is a unique type of loan and it's important to have the right support to ensure you understand what is required throughout the various stages of the process.
If you're planning to build your next Brisbane home, learn why it's important to have a trusted mortgage broker by your side to make the process as smooth as possible.
In this video, hear from an experienced finance broker with Astute, Tony Duncan, on what you need to know when it comes to securing the home you want.
If the idea of building your own home is something you’ve always been interested in and now you find yourself wanting to know a little more about how you can finance your project, you’ve come to the right place.
Additionally, you might love the block of land you currently own but want to undertake a major renovation of your existing home. If either of these scenarios is you, then here’s a breakdown of the key steps involved to help you become better informed on the process involved with this unique type of lending.
What is a Construction Loan?
In short, a Construction loan is financing to fund the build of a house or major renovation of an existing structure. Essentially, this means that the funds needed for payments of construction costs are released as they occur across the period of building, rather than being funded at once. It also means you’ll only pay the interest on the amounts that have been released throughout (the 'drawn down' amount), making it a more economical loan than a standard home loan.
A construction loan is a type of loan that requires detailed planning, as well as thorough project management. Whilst a busy time, with the right support along the way, a new build can be an incredibly rewarding undertaking for enabling the build of something that will be uniquely yours.
Whilst many variables come into the process to either speed up or delay each of these steps, this is a general overview to help you feel a little more informed about the process.
The key steps to secure and manage a Construction Loan
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Stage 1- Find the Property, The Finance & The Builder
1. Connect with your mortgage broker to understand roughly the type of budget you have to work within your current situation.
2. Begin your search of the market to find the right block of land. Upon finding the one you want, this is generally the time you could make a formal offer with the inclusion of a finance clause of 14-21 days. Your broker will advise you further on this.
3. Now the land is known you can now engage a builder to build your dream home!! During this stage, it is perfectly acceptable to source multiple quotes from different builders to understand timeframes and build costs.
*To obtain approval of your required finance, typically you will need to provide the following documents associated to the land and or Build, so it is good to be aware of this before you get too far down the line with your builder:
· Executed land contract (dated and signed by all parties involved)
. A draft or signed fixed price building contract with a licensed builder
· Specifications and floor plans
4. Your mortgage broker will provide a finance recommendation for several lenders appropriate to your circumstances with varying terms. Together, you will decide the lender that will be most appropriate for you.
Part of your finance application will include the provision by you of a deposit. Typically, this could be around 20% of the total property value. If your deposit is less than this you may be liable for Loan Mortgage Insurance (LMI) which acts as further security of your ability to make your repayments.
Stage 2- Finance Approval
5. The finance application would now be finalised and submitted on your behalf by your mortgage broker.
6. If not completed already you can finalise the Build Contract for your dream home through your chosen builder/ developer. This typically requires a small preliminary builder's deposit of approximately $1000-$5000 to finalise plans and specifics. It is a good idea to ensure that this is refundable prior to paying or to consult your Mortgage specialist.
Your builder will also stipulate as part of their contract a builder's deposit. Your payment of this fee, paid at a later stage, will contribute towards the deposit required by your lender so receipts are essential. Be sure to forward these onto your mortgage broker who will factor this into your finance application.
7. Your loan would now typically be approved, and you would be notified by your mortgage broker who will also support you to complete paperwork and make necessary notifications to lenders, solicitors, builder's etc.
8. At this stage your the lender would deposit approved finance directly to your seller's nominated bank account via your solicitor at settlement.
9. You could now pay your builder's deposit (less your preliminary amount). Any surplus of your finance deposit agreed to with your lender will be deposited into a purpose-built bank account.
10. Prior to the construction beginning, the lender will need to site council planning permits and builder's insurance documents. Your mortgage broker will be able to assist with this by liaising directly with the builder on your behalf.
Stage 3- The Build Begins
11. The Approved Construction finance amount would now be ready to be drawn down by the lender and construction can now commence. To recap, the deposit is the first portion of your construction loan to be released if all funds required have been exhausted.
12. As the build progresses, your builder would supply you with invoices for each stage of the build. You would need to sign and pass these onto your mortgage specialist who would then pass these onto the lender to process payment.
13. There are several stages to the build process, and with the completion of each of these stages, you would be able to access the next round of approved funding. Typically, there a 4 key stages after the deposit to a build (as listed below.
14. Your home is now complete. The construction loan now typically reverts to a standard home loan. Hopefully now is your chance to enjoy the fruits of your labour!
The 4 Stages to a Construction Build
Slab Down | Laying the foundation (if a first home buyer this is when your First homeowners grant is released)
Frame Up | Building of roofing and brickwork
Lock Up | Installation of windows and doors
Fixing | Putting in place the internal fittings and fixtures
Completion | Adding finishing touches and the final cleaning of the property.
This is also where you can complete your final inspection and advise the lender you are satisfied and the last invoice is paid.
The timing of construction can be anywhere from 6 months to 2+ years and depends on several factors such as other projects being managed by your builder, the release of funding and course weather. Planning is critical in a construction loan, and it’s important to be clear on the build you’d like before entering into your build. Changes to plans could result in your lender wanting to reassess your loan mid-way through the build, and that’s a scenario that can be problematic for timing and lending terms.
It’s also important to factor in a contingency budget to your loan amount, and this is something that your mortgage broker will be able to assist with.
We hope this has provided you with some further insight into the process of a construction loan. For any further questions, please don’t’ hesitate to reach out to us. We’ll be happy to help you understand the process better so you can decide if it’s the right path for you.