Building a home – or undertaking a major structural renovation project – can challenge even the best-laid plans.
But we are very experienced in building finance and can take a lot of stress out of the equation.
Let’s look at how building loans work.
GIVE ME THE MAIN POINTS
- You access money as you need it.
- You only pay interest on what you draw down.
- You can pay interest-only through the build.
- Take time to plan. It’ll help the building process run smoothly and keep you within budget.
- Keep us in the loop as you build.
A right building loan can help you navigate the cashflow challenges of a big project. By allowing you to draw on your loan bit by bit as needed – a facility called ‘progressive drawdown’ – your interest payments are lower than if you borrowed the whole amount upfront.
WHAT IS PROGRESSIVE DRAWDOWN?
A progressive drawdown – or progress payment – is the portion of your loan funds the lender release at each stage of construction.
If you’re using a registered builder, lender will pay them direct at each stage of the build.
Among other things, lender will need to see the builder’s invoices as well as a progress claim certificate. If you’re an owner-builder, lender will release the funds to you when the lender gets itemised invoices and receipts – and provided you meet lender's other requirements. Lender will need these at each completed building stage.
Importantly, they must match up with progressive payment schedule the lender agreed to when the loan was approved.
PAYING INTEREST-ONLY ON YOUR LOAN
Most building loans are designed to ensure you don’t draw more than you need – or exceed the construction costs you’ve budgeted for.
That’s why building loans can begin with an interest-only period. This means you’ll be paying interest-only – and only on the amount you’ve drawn down.
WHAT’S SPECIAL ABOUT A CONSTRUCTION LOAN
Most building loans are a standard home loan – with additional building conditions.
So what’s the difference? Let’s look at two $500,000 loans – one standard, one construction – to see how it works.
If you have a standard home loan – without building conditions – you must draw down the total loan by a certain time, usually on settlement. The full $500,000. That means you’re paying interest on the whole loan amount – all $500,000 – from the start.
But if you have a construction loan for $500,000, then you draw down what you need in instalments, to cover the costs of each part of the project.
If your first invoice from the builder is for, say, $50,000, then that’s what you draw down. That’s what you pay interest on. You only pay interest on the rest when you draw it down later in the project.
One more thing. Lenders need the paperwork in order (all invoices etc.) before they release each progress payment.
INSPECTIONS AND VALUATIONS
Before you start building, lender will need an ‘as if complete’ valuation – an estimate of the market value of the land and proposed building/renovation. They also require further inspections and valuations through the project to be sure everything’s on track and within budget.
COST OVERRUNS
ost overruns are when the building expenses exceed the planned progressive payments the lender agreed to at the start of your loan.This sometimes happens. You might change your cladding from timber to brick. You might opt for wooden joinery instead of aluminium. Or you might simply decide you want double powerpoints instead of single ones.
If you exceed the amount the lender agreed upon, you need to talk to us or the lende ASAP about next steps. If the lender can’t provide additional funding, you’ll need to cover the extra cost yourself
YOUR FINAL PAYMENT
Once your mighty work is done, the lender will need some last bits of paperwork before they release the final tranche of money. Once the interest-only period of your loan ends, your loan becomes principal and interest. If you finish building before then, you can change the loan over to principal and interest.
Congratulations! You've built your dream home. Make sure you invite the neighbours to the house warming party.
