Construction loans: How they work (Australia)

With everything getting more and more expensive these days, buying a new home is near impossible. People are looking for alternatives, such as construction loans, to hopefully build that new home they’ve been dreaming of while saving every penny they can in the process.

So what are construction loans and how do they work?

Say you’ve been living in your current home for over 15 years and you feel it’s time for you to move out and look for a better place. You have the option of either buying an established property or building a new house from the ground up. If you choose to build instead of buying a property, construction loans come to mind.

What are construction loans?

A construction loan is a lending option that assists people financially in renovating or building the house they’ve always wanted. This is different from a house loan, which is given to people who want to buy an existing property.

This lending option is slowly becoming a more popular option in Australia. According to the Australian Bureau of Statistics (ABE), there has been a 20 percent increase in the value of construction loans in the past two years. So, if you are wondering if it’s a good option or not, that could put your mind at ease.

How do you get a construction loan and how does it work?

Once you’ve decided on getting a construction loan, you would first apply for it. This means paperwork. A lender will only agree to a loan once the council approves the building plans and the building contract.

The lender then gives an estimated value to the cost of the land and the construction itself. A valuer will check if this amount is enough to guarantee that the property can be sold for the said amount. The lending amount will now be based on that settled value.

Now in a typical home loan, you are given a lump sum of what you would receive. For construction loans, however, they come in progressive payments, which is also called a progressive drawn-down. This means you increase your loan when needed during particular stages of the construction – five stages to be exact.

You have the concrete slab phase, framing phase, lockup stage, fixing stage, and then the completion stage.

In the slab phase, an amount is given to help lay the foundation of your structure. In the framing stage, it helps cover some expenses for brickwork, roof, and windows. In the lockup stage, it helps answer for the external walls, windows, and doors. In the fixing stage, assistance is given for installation of plumbing, electricity, and gutters. And for the final stage, it covers expenses for finishing touches, builders, equipment, and other contracted items.

A lender will have a valuer check the construction on these certain stages and release amount needed when fit. This means more protection for both parties.

So, what do you think? Is it time for you to start building that dream home by using a construction loan?