9 steps that will help you navigate and understand what needs to be done at each stage of building your dream home!
1. Know your Budget and Get a Pre-approval
The first step is to find a Mortgage Broker who will listen and understand your desired outcomes. They should also understand your goals and dreams in the short, medium, and long term. A mortgage broker that has a great reputation with experience in construction loans is highly desirable.
Your Mortgage Broker will advise you on your borrowing capacity and provide advice on how to increase your borrowing capacity. Your Mortgage Broker will help you obtain a Pre-approval so you know exactly how much you can spend. As part of this process, your Mortgage Broker will provide you with valuable advice and help you to compare the lender and loan product options available to you so you can decide which lender you will get a Pre-approval with. Make sure you discuss the following things with your Mortgage Broker before finalising your lender selection:
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How long would you like the loan repayments to be set to Interest Only (ie. rather than Principal and Interest repayments)?
It is common for construction loans to be Interest Only (IO) during the construction period. In most cases, for the first 12 months of the loan term, the loan repayments may revert to Principal and Interest (P&I) repayments. Having the loan repayments as IO during construction helps you to keep the cost down. This could be helpful as you are most likely having to pay rent or another mortgage on the house you live in, whilst your new house is being built. If you would like your IO period to continue beyond the first 12 months, this is something you should discuss with your Mortgage Broker upfront.
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What Loan features do you want and need?
Consider features like offset accounts and redraw facilities that may enable you to reduce your interest expense in the future. Whilst most banks only offer a variable rate construction loan, there lenders that offer competitive fixed rate constructions loans. As a result, if you would like to lock in the interest rate you may prefer to explore those options.
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How much of your own savings will you put towards the build?
If you have savings or equity in another property, it is important to discuss how much of this you would contribute to the new build. On the other hand, if you are hoping that 100% of the building costs will be covered by a loan you must make your Mortgage Broker aware of that. Whenever you are about to commence a building project, it is always important to make sure that you have a good amount of buffer savings funds (NB: try and have at least 15% of the total costs as a savings buffer)
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Fees and Charges
As well as understanding and comparing the applicable interest rates, make sure you understand fees associated with each lender and loan option. For example, some banks charge once off upfront fee at the beginning of construction loan to manage the administration required to facilitate the progress payments of the construction loan, whilst, others charge a fee per progress payment (NB: more on Progress payments below). Additional costs such as Lenders Mortgage Insurance (LMI) may also have to be considered and included as part of your budget.
Understanding your budget and borrowing capacity and having your finances all sorted will greatly assist you when considering the right design and builder for your home.
2. Secure the Land
Once you know your budget you can start planning where and what you want to build.
The First step is to decide on the location of your build. Are you wanting to demolish your current home and build on your existing land? Are you looking to purchase a new block of land for your dream home? If you want to stay where you are, you will have to factor in the cost of demolishing your existing home as part of your budget. Contrastly, if you want to buy a new block of land, you have to factor in the cost of stamp duty payable on the new purchase. Either way, make sure you understand all upfront costs associated with your choice and have them factored into your budget.
3. Find the right Builder
Once your budget and location are established, you need to decide what you will build and whom to build with. At this stage, it is always useful to make the time to visit display homes. This helps to a feel for the type of home that suits you and your family’s lifestyle in the future. When deciding on your build, try to estimate how long you plan to be in your new home and your family’s needs which might change over time.
When selecting a builder make sure you choose a Registered builder with a good long-term track record. Look for builders who have glowing customer reviews and speak to someone who has previously worked with the builder before. This will help get your honest feedback about the builder you are considering.
4. Finalise the Building Contract and your Selections
When negotiating your Build Contract, ensure that it is a fixed price contract and there will be no nasty surprises. If there are components that the Builder cannot lock in the price upfront, make sure you are aware of this. Having plenty of buffer funds available in case there are cost blowouts is essential. Many common building pitfalls are due to errors or misunderstandings of the building contract (e.g. inclusions or exclusions in your building contract). Therefore, make sure you feel confident in signing the documents as making changes down the track can be costly.
Ultimately, the more effort you put into determining and communicating exactly what you want and ensuring you understand what is and what is not included in the building contract, the smoother the process will go.
Variations can be very expensive
It definitely pays to spend extra time thinking about the exact design and finishes and fittings you want upfront. Often when people are negotiating a building contract with their builder, they are focused on the dollars and wanting to save money where they can. This may result in them making the decision to leave out upgrades or extras that they actually really do want. Inevitably, these same people have regrets during the building process and end up initiating variations during the construction process. Doing this results in a greater expense compared to if it was included in the original contract to begin with.
Once you have decided on your builder and finalised building contract negotiations, ensure the builder takes out the appropriate insurance including Building Indemnity Insurance. This protects you in the case that you sustain loss or damage. Especially if the associated compensation for the loss or damage is not recoverable from the Builder due to death, disappearance or insolvency of the Builder. Make sure your builder provides you with a copy of the Building Indemnity Insurance policy related to your specific property in your names before you commence construction.
Your builder should also assist you to finalise your building plans and get them approved by council.
5. Get quotes for all out-of-contract items
If there are items you are planning to do yourself outside of the fixed-price building contract, these are referred to as out-of-contract items. These items might include non-structural finishes such as floor and window coverings, pergolas, landscaping, swimming pools fencing etc. All additional work or items you intend to purchase (or receipts if you have already purchased the items such as kitchen appliances, bathroom tiles, a swimming pool etc.) must be formally quoted for both supply and installation. Your Mortgage Broker will work with you to help you understand what you will need to provide to ensure that these out of contract items are able to be funded from your construction loan if that is your preference.
6. Get your Finance Formally Approved
Once you finalise your plans and building contract, you are in a position to work with your Mortgage Broker. Your Mortgage Broker will help to turn your Pre-approval into a Formal Finance Approval. To do this you must provide your Mortgage Broker with a Bank Pack (which will most likely be put together by your builder on your behalf). The Bank Pack includes documents like your council approved plans, permits, insurance provisions, copy of fixed price building contract (including a Progress payment schedule) and specifications.
This Build Pack and your out-of-contract item quotes will be used to arrange a valuation of your new home. This will be done on an ‘as if complete’ basis. This means the valuer will review the documents and your land and determine what the end value of the home will be after construction is finalised to the specifications in the Build Pack. It is not always the case that the valuation is the sum of the value of the land and the cost of the build added together. It is important to understand the market conditions of the area you are building in to ensure that the cost of your build doesn’t outweigh the value of your home (also known as over capitalisation). Your Mortgage Broker can help work through this with you.
Note of Caution:
Whilst you would undoubtedly be excited and keen to start the construction work ASAP, it is extremely important that you do not commence any work on site (including demolition of the existing house) until after your construction loan has been formally and unconditionally approved.
7. Commence Construction and Manage the Progress Payments
You will be ready to start building when you have unconditional approval as well as your loan documents being signed.
A construction loan works differently to a traditional loan. The balance of your construction loan will slowly and progressively increase over the duration of the Build. This happens as your Builder completes the work of each milestone stated in the contract. This allows you to keep your costs down as you are only charged interest on the drawn balance of loan (ie. rather than the loan limit). Basically, the Builder must complete the work associated with each milestone in the Progress Payment schedule. Once completed then only the Builder will issue you with an invoice. You will then approve the invoice in writing giving your Mortgage Broker and Bank authority to pay the builder directly. The invoice should match up with the amount specified in the Progress Payment Schedule of the Build Contract.
A typical building project has several stages including:
- Preparation – includes plans, permits, connection fees, insurance etc.
- Base – includes concrete slab, footings, pad and base brickwork.
- Frame – the house frame is complete and approved.
- Lock-up – the windows and doors, roofing, exterior and insulation are all done.
- Fixing – e.g. your kitchen cupboards, appliances, bathroom and toilet are all in. Whether your home has plumbing and eletricity. Your home’s plastered and painted.
- Completion – fences up. Site tidied. The builders receive their final payment.
If you are contributing your savings towards the build most banks will require you to put that in first. This payment goes towards the payment of the first (and maybe even subsequent) invoices before they start paying towards the progress payments. It is important that you get a receipt from the Builder showing the exact amount you have paid. Your Mortgage Broker will help you navigate through this.
Generally the Bank will conduct inspections during the build ensuring that the construction is progressing in line with the contract. This commonly happens before the first and last progress payment to the builder.
If you have any additional variations along the way (ie. that were not included in your Build Contract), most banks will require you to fund these out of your own pocket (NB: this is why it is important to always have a good savings buffer available to you before you start). If you do not have the cash to fund these variations, speak with your Mortgage Broker before to see if it is possible to go back to the bank and get approval to increase your loan limit.
8. Completion and Handover:
Once construction is complete, your Builder will issue you with a Certificate of Occupancy and your final progress payment invoice. Most banks will want to inspect the property before paying this final invoice to the Builder. This ensures what has been built reflects what was initially proposed as per the original plans, build contract and specifications.
Following this final payment to the builder you will experience the excitement of the Handover. This is where the Builder will finally hand over the property to you and you can enjoy your New Home!!!
9. Review and Amend your Loan Facility
You will most likely find much better lender and loan options available to you now that your construction is complete. Speaking to your Mortgage Broker about getting your home revalued and reviewing your loan facilities is a must. This determines whether it is in your Best Interests to:
- Keep your existing loan as is and let it revert to P&I repayments as originally planned; or
- Keep your existing loan but make a variation to the loan (Eg. consider fixed rates or change the repayment type); or
- Refinance the loan to a better and cheaper loan product with either the same lender or a new lender.
Your Mortgage Broker should be by your side, the entire time helping every step of the way throughout the journey.
Got any questions? Let us know by leaving a comment below or contact us directly here! To learn more about how to build your dream home, or learn about home loans, visit Rise High Tv for more useful tips!
