Building a new home can be an exciting and rewarding experience. You get to choose all the features you’ve always wanted and create a home that is uniquely yours. However, finding the right construction finance to suit your needs can be challenging.

How Do Construction Loans Work?

Construction loans work differently from regular home loans for established houses. When you buy an established house, the financier extends the amount of money you borrowed to complete the purchase, and you simply move into your new home.

With construction finance, your financier will set up progressively drawn payments that add up to the total amount you borrowed. As your builder constructs your home, your financier receives an invoice for each stage of construction as it’s completed. Your finance is drawn several times until the builder is paid, your house is complete, and you can move in once all stages are finalized.

While this process may seem complicated, you don’t have to navigate it alone. A qualified mortgage consultant can guide you through each step, ensuring there’s no confusion.

Stages of Construction

The building process is split into standard construction stages. Here’s an example of a 5-stage schedule:

1. Foundations/Slab: Laying the foundation, levelling the ground, plumbing, and waterproofing the foundation.
2. Frame: Building the frame, partial brickwork, roofing, trusses, and windows.
3. Lockup: Installing external walls, lockable windows, and doors.
4. Fitout: Adding gutters, plumbing, electricity, plasterboards, and partially installing cupboards.
5. Practical Completion/Final Stage: Completing finishing touches, final plumbing, electricity, overall cleaning, and making final payments for equipment and builders.

How Do Progress Payments Work?

Progress payments allow you to use your construction loan to pay for specific stages of your build or renovation at various steps of completion. Interest is only charged on the amount you’ve drawn down, rather than the total construction finance amount you’re approved for, helping to keep costs down.

Progress payments can be requested in various ways, as advised in your ‘Builders Commencement Letter’. If your builder needs money upfront to issue plans, you’ll need to cover that yourself. If you’re contributing any of your own money, do so before the first progress payment is made.

The final progress payment is subject to a satisfactory final inspection from the financier’s valuer, confirming the construction has been completed as per the original plans and specifications. You’ll also need a new building insurance cover note.

Do I Need To Buy a House & Land Package To Get a Construction Loan?

It’s not always necessary to purchase a house and land package from one location, although it can simplify your home finance options. You might find land you prefer elsewhere or choose a different builder. The choice is entirely yours.

You can purchase your vacant block of land first and then find a builder once your land has settled. This might mean arranging two separate finances: one for your land purchase and another for your construction.

Do I Have To Use A Licensed Builder To Construct My Home?

While some financiers may allow you to build your own home, this option is not for the faint-hearted. Most financiers prefer that you use a licensed builder to ensure the home you build will be a good security property for a long time.

What Documents Will I Need?

At Application:

• Council approved plans and specs (or, if not yet approved, a copy of those plans which have been, or are to be submitted to Council for approval)
• Signed & dated building contract, including the building stages and schedule of payments
• Variations/quotes, if applicable
• Quantity Surveyor report when requested by the financier’s valuer

Before the First Builder’s Payment:

• Council approved plans and building specs (if not already provided)
• Builders Risk Insurance and a copy of your builder’s ‘Public Liability Insurance’

If you have set up progress payments, make sure you have your documents ready to upload. If an inspection is required, it may add 4 to 5 business days before a payment can be made.

If you’d like to explore more options for building your new home and finding construction finance that suits your plans, contact a professional mortgage lender today.

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