There’s a lot to talk about when it comes to how construction loans work, but let’s start with what they are!
What is a construction loan?
If you’re looking to build or renovate your property then a construction loan may be available to you!
There are four main options to consider when you’re looking to build or renovate. These are the circumstance in which you might want to consider getting a construction loan:
1. Buy land and source a builder
This is the most popular option for most of our clients. It’s likely your dream home is going to be a custom build so you can get exactly what’s best for you. One of the things you may need to consider is whether you will need to do any demolition before you start your build. It’s important you factor this into your budget at the beginning to avoid any unexpected costs. The cost of demolition won’t be factored into your loan.
Your construction loan will be split into two. The first part of the loan will be for the land. The second part of the loan will be pre-approval for the build. This means you have peace of mind knowing you’ll be able to build on your land!
2. Purchase a house and land package
This sounds the same as buying your land and sourcing your builder. But if you buy a house and land package you only get one loan for the entire process. This way you know you have your finances sorted from the very start!
3. Buy off the plan
If you’re choosing to buy off the plan you basically get to sit back and wait for the keys. Buying off the plan can come with some risks, so if you would like to know more about the process read our blog here!
When applying for your loan you can get pre-approval, but there are some extra risks. There is a delay between signing and settling which makes your loan a little difficult. You can’t get full approval until the build is done. So if your financial position changes between when you sign the contract and the settlement there is no guarantee you can get the same finance.
4. Renovating an existing home
If you already have a home, you might be finally doing those renovations to make it the home of your dreams! Doing a budget for your renovations will help you avoid overspending and what repayments you can afford. If you’re not sure what your borrowing capacity is you can get an idea with our calculators here!
As part of your budgeting, you’ll be getting quotes for the work you’ll need to be done. Your lender will use these quotes to assess the value that will be added to the property. As an added bonus, no stamp duty since you’re not making any new property purchases!
How does a construction loan work?
Your involvement in construction can be much more intense than that of a general property purchase. Your construction loan is the same!
Just as you read before, the loan is usually split into 2 parts. Part 1 for the land purchase and part 2 for the build. Part 2 is split even further into, typically, 6 progressive payments. These payments are distributed throughout the build, to ensure your builders get paid as they progress. This is something your Rise High broker will manage for you!
Applying for the loan:
Applying for a construction loan is similar to any other loan. The bank still wants to see the usual information so they know your asset and liability position. This process can be done before your find your land or builder so you’re ready to start as soon as possible!
Build or finance pack:
Once you secure your property or your builder it’s on to the next step! The bank will need a Build or Finance Pack. This pack will include the contract for the build, plans, specifications, design, progress plan schedule, and measurements of your new home. You don’t even need to have your council approval yet to get your finances approved!
Out of contract items:
Sometimes you can’t think of everything in the initial plans. But that’s ok! You can borrow extra for “out of contract items”. These items are anything that wasn’t included in your contract. Such as, airconditioning, flooring, landscaping, etc. But you will need a quote for the bank to approve the extras on your loan.
Are there any grants available for new builds?
First Home Owners Grant (FHOG) – $15,000 is available to all first home buyers on new properties or homes that have been built but never lived in.
Off the Plan full stamp duty concession – If you purchase a new apartment you may be eligible for an OTP stamp duty concession of up to $21,330 (capped at stamp duty payable on a $500,000 apartment). *Excludes foreign purchasers.
Land Tax Exemption for Investors on OTP Purchases – If you enter into an eligible off-the-plan contract for the acquisition of land between 22 June 2017 and 30 June 2018, and you receive the stamp duty off-the-plan concession, you are entitled to a 5-year land tax exemption.
$10,000 Grant for Eligible OTP Apartment Purchases – Purchasers who enter into an eligible off-the-plan apartment contract between 22 June 2017 and 30 September 2017 may be eligible to receive a $10,000 grant. The grant will be paid after settlement (generally around the time the stamp duty is paid by the purchaser). *Excludes foreign purchasers.
What is the valuation process?
Once your home is finally complete, there is one final step to complete. The bank will complete a valuation. This processes allows the lender to assess whether the properties new worth matches the amount they calculated the loan against. The bank will always lend against the valuation amount.
Sometimes unexpected costs can push you over budget. If this is the case and your valuation is less than your total purchase price, you may need to make up that shortfall. So it’s important to stick to your budget as much as possible and plan for unexpected costs.
Off-the-plan builds are subject to different rules. So if this is what you’re considering, make sure you read the blog linked above so you know all the risks!
Building your dream home should be an enjoyable experience! Contact the Rise High team today and we can help make the process easy and fun for you!
We can help calculate your borrowing capacity and find the right construction loan for you!