Finding the right home for your family or investment opportunity can be difficult, that's why many Australians consider building a new home or renovating an existing home to suit their specific style and requirements.
Whether you are looking to build a brand new home or to renovate, you generally need to apply for a construction loan instead of a standard home loan to help build your dream home.
Construction loans can make the building process hassle-free, but it’s important to do your research and know what’s involved, that’s why we’ve put together this guide to help you understand what a construction loan is, how they work, and what you should consider before filling out the loan application.
What is a construction loan?
A construction loan is a specific type of home loan for when you are looking to build a new home or renovate your existing home. The key difference between a construction loan and other types of home loans is that it allows home builders to withdraw funds at different stages throughout the construction process while ensuring you only pay interest on the amount you use.
How does a construction loan work?
Instead of making a single payment from your home loan to purchase a new home, a construction loan allows you to make progressive payments at different stages of your home building or renovation process usually referred to as ‘’Progressive Drawdown’’.
Your builder will provide you with invoices at each stage of the construction, which you will then need to forward to your bank or broker to release the funds and then pay the builder.
Different stages in the construction include:
- Site clearing (if needed)
- Base stage
- Framing stage
- Lockup stage
- Fitout stage
- Settlement and Handover - Completion
With most lenders, you are only required to pay interest on the drawn-down amount, for example, if you have only drawn down $50,000 of your $300,000 loan, you will only be charged interest on the $50,000.
Generally, your loan will start off as an interest-only loan until the home build is completed and the final progress payment has been made. Your loan will then switch over to principal and interest repayments. It’s important to check these details with your lender to ensure you can budget for when your home loan repayments change.
Applying for a construction loan
To apply for a construction loan, you will need to provide the same documentation required for a standard home loan application including identification, proof of income, expenses, and a list of any other investments. You may also need to provide extra documentation relating to your home build or renovation such as a copy of the building contract, your building plans and specifications, council-approved plans, and builder's insurance.
How much deposit will I need?
Majority of lenders will require a 20% deposit for your construction loan, this means your LVR will be 80%. However, some lenders only require a minimum of 5% deposit when you are eligible for home owner or builder grants. Always check the requirements with your lender before applying for your construction loan to make the process quicker and easier.
When should you look at getting a construction loan?
- Construction loans are mainly used for when you are looking to build a brand new home
- They can also be used for renovating you home. This is a great way to help you figure out how much you have to spend and helps you stick to your renovation budget.
If you have an existing home loan and looking to renovate, it can be the ideal opportunity to look at refinancing your home loan to find a better rate.
1. Home and land packages for first home buyers
Buying a house and land package is usually a two step process where the land is purchased first using a regular mortgage, the second step is building your home which requires a construction loan for progressive payments to be made.
Some states offer new home building grants, so it’s a good idea to check with your state government if you are eligible to save you money.
2. Home Renovations
Hom renovations have become increasingly popular during the last few years, especially since many spent majority of the last two years at home and have also started working from home.
Similar to building a new home, when renovating with a construction loan, you will receive your loan in increments to make progressive payments. This means you don’t pay interest until the work has been completed.
3. Property Investment
Building an investment property in a new suburb is a great opportunity as it can allow you to build dual occupancy giving you more return on your investment.
It’s important to note that you will not receive a rental income until the house is complete and a tenant has moved it, meaning you will need to pay interest on the drawn down amount over the home build period. So ensure you include this in you budget.
Finding the most suitable loan for your needs
With over 100 lenders in Australia, comparing home loans can be an overwhelming and stressful process, the last thing you want is to settle for a construction loan that charges a higher interest rate.
Joust has access to over 80% of lenders in the market and can help you find the right construction loan for your needs without the stress and hassle of contacting multiple lenders.
What you need to know before applying for a construction loan
Before applying for a construction loan, make sure you consider whether building a home or renovating your current one is the right move for you. There is a higher risk involved with construction loans, this means you could be looking at a higher interest rates. Joust can help you compare options available to you.
You should also consider factoring in additional funds as there is no guarantee your build will stay within budget. Ensure you check with your state government to find out if there are any home-building grants you may be eligible for that can potentially save you money.
Step by step guide to applying for a construction loan in Australia
1. Reflect on why you want a construction loan and if this is the best option for you
The first and most important step is to assess why you want a construction loan to determin if this is the best option for you. If you are building a new home, usually it’s necessary to apply for a construction loan as it can help you budget and also save on interest.
If you are looking to renovate your home, there may be other options you should consider before opting for a construction loan such as topping up your current mortgage, refinancing or redrawing.
2. Calculate how much you can afford with your construction loan
The second most important step is to figure out and set your budget. We have a range of free online calculators to help you budget.
If you are apply looking to apply for a construction loan with less than 20% deposit, you will also need to factor in LMI costs, however there are ways you can qualify for a LMI waiver.
3. Choose your builder
Finding a builder can be just as overwhelming as finding your home loan, it’s also the fun part as you start putting your ideas on paper!
Make sure you do your research and go to different display home villages to get a good idea of what you want in your home, it’s also a good chance to see if there are any special buidler promotions on offer to help you save.
4. Have your plans approved by council
The next important step before applying for your construction loan is to make sure your plans are approved by council. You will need these documents to provide to your lender when applying for your construction loan.
5. Apply for your construction loan
Once you have all the plans approved and your are ready to start the building process, it’s a good idea to research your construction loan options, Joust can help you find the most competitive and suitable loans on the market in under 3 minutes.
How to increase your chances of getting approved for a construction loan
Tip #1 - Ensure you have all the necessary documentation to prove your home build. And make sure they have been approved.
Tip #2 - before applying for a construction loan, ensure you have developed a good savings habit that can increase your chances of getting approval. This may mean dialing back on the Uber Eats for a couple of months.
Is getting a construction loan a good idea?
Depending on your circumstances, construction loans are usually the preferred option for a new home build.
Benefit #1: Lower repayments - Your construction loan will start off as Interest Only meaning you save from making lower monthly repayments. You are also only required to pay interest on the amount drawn from the loan.
Benefit #2: Progressive Payments - the ability to draw down on your loan at different stages of the build process means you can better budget and manage your construction loan and repayments.
Benefit #3: Building your dream home - it’s a chance to build the home you have always dreamt of, exactly to your desired style and requirements.
How can Joust help you with getting a construction loan?
Our Instant Match service helps you access various flexible home loan options to find the one tailored to your needs. So, whether you're looking for a loan to build or to refinance, Joust can help connect you with a suitable option at comparatively lower interest rates.
Just answer some basic questions and get ready to compare the three lowest-rate home loan offers that match your requirements.
Disclaimer:
The information in this blog article is current as of December 2022 and is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.
