What are Construction Home Loans
Home renovations in Australia have taken off in the last decade. With the popularity of DIY and home renovation shows demonstrating how lucrative renovations can potentially be, many Australians have taken to their own renovations to upgrade their homes or rebuilding as a cheaper alternative to moving.
What is a construction loan?
To meet the needs of this area of the home loan and mortgage market, many lenders have introduced what is known as a construction loan or also called a home loan with a construction facility.
These facilities are different to a home loan for an established property.
How does a construction loan work?
Unlike regular home loans where you typically receive a lump sum at settlement, construction loans are paid out periodically. This is known as progress payments and are made at different stages of the construction.
A construction loan is designed to help you buy the land, build a residential dwelling on the purchased land or conduct any construction or renovation work necessary.
There are usually up to five progress payments at various stages of construction, for example:
When the slabs are down
When the framework is up
When the external brickwork is completed
At the lock up stage (i.e. when the building can literally be ‘locked up’
At practical completion.
These progress payments are made over time to ensure that the builder isn’t paid for work that hasn’t been completed and there are measures to protect the borrower from any financial loss during the construction period.
Some lenders will require a valuation check to ensure that the work has been completed, and to an acceptable standard, before releasing the next payment.
Consequently loan repayments for a construction loan are interest only and payable on the amount of the loan actually drawn down.
Once the renovation has reached practical completion and the final progress payment has been made, the loan will revert to a permanent mortgage, i.e. principal and interest.
If you have been thinking of renovating and want to find out how much money you could access and the outcomes specifically available to you, click on this link here to book some time to have a chat.
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