When building a new home, you will not need the entire loan amount to drawndown at once. Doing this means making interest repayments on the entire amount right from the start.
Construction loans give you the flexibility to progressively drawdown loan amounts based on the stage of construction.
How construction loans work
With a construction loan, the drawdown of the loan amount is split into five progressive draws, which link to the construction phases. When one phase of the construction is completed, you can drawdown the next portion of the loan. The advantage to you is that interest is only being paid on that amount which has been drawndown and you are not making repayments on the portion you have not used.
After construction has finished, you can nominate what type of loan you want to have. Often lenders provide around 60-65% of the land value for purchase, which this is usually done as a land loan. Although some lenders will lend up to 90-95% of the land value, so it is a good idea to shop around.
If you decide to apply for a construction loan, lenders usually want to see council approved plans and a fixed-price building contract before they approve a construction loan.
Here are some reasons why people take out a construction loan:
• Less interest: You save money during the construction period, as you are only charged interest on the amount drawn down and not the entire approved loan amount.
• Lower repayments: Loans are generally interest only during the construction period, which means lower repayments. This will be particularly handy if you are paying rent or a mortgage somewhere else.
• Protection: By making progress payments to your buildier instead paying them 100% up front, you and your lender can make sure that builders and contractors aren’t being paid for work that hasn’t been done, or done properly.