The process of a construction loan is slightly different from that of purchasing an established property. This is because it is generally divided into two separate phases.
The first stage of a construction loan is to obtain finance to purchase the block of land. Naturally, if you already own your land then there is no need for this!
Stage 2 involves obtaining funding for construction. Usually this loan will ‘pay out’ the land loan as well, so at the end of the process you only have a single home loan.
In order to obtain the loan for construction, the lender requires a building contract, plans and specifications. Your builder should be aware of lender requirements and endeavour to provide these to you as soon as possible. A substantial amount of work needs to be done by the builder to prepare these so it can take quite some time – this often depends on factors such as whether the land is titled, whether the design is ‘off the shelf’ or if you are making substantial changes to your home design.
Once your loan is approved, the builder commences the construction of your home one all the necessary permits etc. are in place. Your builder doesn’t get paid up-front for your home; neither do they get paid at the end. Instead they request payment in stages – known as ‘progress claims’ – which reflect the stage of construction that your home has reached.
There will generally be 5 or 6 progress claims. Typically these will be for a deposit payment, once your slab is laid, when the walls are up (‘plate high’), when the roof is on, at the lock-up stage, and then practical completion / handover.
As your builder reaches each stage of construction they will invoice you according to your building contract. Generally you will provide this invoice to your lender with your authority to pay – the lender the releases those funds to the builder.
This is known as ‘progressive drawdown’ and your loan repayments are based on the portion of your loan that has actually been disbursed (or drawn down). Repayments until the loan is ‘fully drawn’ are interest-only which can assist with your cash-flow during the construction process, especially if you have to pay rent, board or loan repayments on another property.
Construction loans are thus a more complicated and drawn out process. Your UFSWA Mortgage Broker will liaise with your land agent, builder and bank to streamline the process form beginning to end, leaving you more time to enjoy the building experience! Request an appointment with our Mortgage Broker today.
Disclaimer: Loans are approved or declined on their merits by the specific lender and a loan approval is not guaranteed. We believe the information on this page to be correct. However we can give no warranty to this effect and expressly disclaim any liability for loss or damage by any person acting upon the information provided herein.