A property construction loan is a type of home financing that allows you to build your own home or investment property from the ground up. It is quite different from your regular home loan and it is very important to properly educate yourself on all the ins and outs of how they work as this will save you a lot of time and money.
Building a home can be quite a complex process as it involves multiple parties including builders, contractors, lenders, solicitors, accountants, quantity surveyors and the council.
Obtaining approval for a property construction loan can be quite tricky so it’s best to speak with an experienced mortgage broker who has worked in this space for a number of years as they will understand the process and be able to guide you through it.
How is a property construction loan different from a regular home loan?
Unlike a home loan which is paid in a lump sum, property construction loans are dispersed at different intervals as each stage of the construction has been completed. Lenders require the builder to produce an invoice for payment before the funds are released. These payments are called progress payments or also commonly known as draw-downs which are generally made over 5 stages of the property construction.
The 5 stages of a property construction loan are:
- Stage 1: Slab Down
- Stage 2: Frame
- Stage 3: Lock-Up
- Stage 4: Fit-Out
- Stage 5: Completion
Lenders will need a signed copy of your fixed priced contract with your chosen builder which will outline the amount needed to complete the construction of your home. At the completion of each stage, your lender will send someone out to check on the progress of construction before they make a progress payment to your builder.
How is interest charged on my construction loan?
While construction is being completed, you’ll only pay the interest on your loan – you will not be paying any principal down on the property construction loan until construction is 100% complete. As an example, if you obtain approval for a $400,000 property construction loans and you have only needed to pay your builder $100,000 to date, you will only be charged interest on the $100,000 you’ve currently used.
At the completion of construction, you do have the opportunity to ask your lender to continue with interest-only repayments for a period of time or start paying principal and interest repayments as soon as your home is complete.
Property construction loans can come with competitive interest rates and low-deposit options but if you select the wrong lender this could end up costing you a lot more than it needed to.
Speak to Financial Scope Melbourne for experienced advice, industry-leading loan options, and professional service, to help navigate the world of property construction loans.
Disclaimer: Your complete financial situation will need to be assessed before acceptance of any proposal or product.
Clint Thomasson
Clint has over 14 years experience in Financial Services working with major corporates including NAB, AMP, ANZ, and AXA. With a passion for Mortgage Broking, coupled with his outstanding interpersonal skills, Clint’s drive is all about matching your needs with the right financial solution. Whilst many businesses offer Finance Broking services, the difference you’ll find with Clint is his ability to listen, engage, retain knowledge and accurately match your requirements. Not only that, but he’s also a very friendly and genuine person with a great work ethic – you’ll have full confidence that he will deliver in a timely and highly efficient manner, every time.
