When you’re looking to build a house, development or even complete a major renovation, a construction loan is used to provide the finance. Construction loans have unique features which are structured to manage the payment of stages of builds, tradesmen and ensuring that the end property is worth the cost of building.
How does a construction loan work?
Unlike a normal home loan where the full loan amount is provided when you make a purchase, a construction loan is paid in portions known as progress payments, so as your construction progresses the loan amount increases in line with the stages being completed. As a rough guide there is generally five stages in which payments are made – when the slab is poured, frame constructed, brickwork, lockup and final completion.
Depending on the type of construction and lender requirements, they may send a valuer out to inspect the stage to ensure the work is completed to a satisfactory level before paying the builder.
During construction, you only pay interest on the drawn down loan balance, meaning you will only make the full repayments when the build reaches completion. Likewise you can elect for repayments to be interest only during the build, to minimise your cash flow requirements.
Are there any different costs with constructions loans?
The main difference in construction loans is fees – with many lenders charging a fee at each progress payment. For the most part however there is minimal difference in costs between mainstream loan products and construction loans in the current market and interest rates are priced the same as standard loans.
What happens when my construction completes – does the loan need to change?
When your construction has completed, the lender will organise a final inspection of the property to ensure the build has completed as originally designed and that the value of the property now complete is sufficient to secure your loan. Once this is finalised the loan will then revert to a standard loan, requiring no changes. Your broker will be able to help you however in making any adjustments you may want now the loan is complete – including changing repayment frequencies, whether you would like to retain and interest only loan or principal and interest, fix your loan etc.
If you would like help in understanding how construction loans work – Precision Funding’s experts are experienced in construction loans and can help you with selecting the right loan for your needs. Connect with us today to find out what is available to you.