Construction Home Loans
When some people buy property, they want as fresh a start as possible. While purchasing a home always offers the opportunity of new beginnings, only taking out a construction home loan affords you the chance to build something of your very own from scratch.
What are construction home loans?
Some home buyers can afford to build a home from the ground up by financing it themselves. For those who can’t, a construction home loan is used to finance the process.
The major difference between construction and regular home loans is that, rather than getting the necessary funds in one lump sum, they are drawn down in stages as construction proceeds. Rather than paying interest on the entire loan from the very beginning, you only make interest repayments on the sum that you need at the time. This can dramatically reduce the long-term cost of the loan.
The stages that the funds are drawn down parallel the main stages of home construction. These are generally:
- Deposit – you will need to pay this to the builder before work beings. If purchasing land, you will need to pay a deposit on that, too
- Slab or base – which involves the laying of plumbing, slab piering and the pouring of the concrete slab
- Frame – the erection of the wooden framing, and its approval by a building surveyor
- Lockup – when external wall cladding and roof coverings are fixed, flooring is laid and external doors are put on
- Fit out – essentially the installation of the many different internal elements, such as doors, fixtures, baths or basins
- Final – or the practical completion of the property
Bear in mind that lenders typically tend to charge a progress payment or drawdown fee for every stage of construction. This is to make up for the costs of giving a borrower access to these funds.
You will typically need to provide the lender with a builder’s invoice and fill out a loan disbursement authority for each of these stages. There’s also a few things you’ll want to check off at each stage before construction progresses, such as making sure the work is fully completed and that it meets your specifications and the contract plans.
Before the final payment goes through, you might also pay an independent consultant to review the property to make sure there are no faults and that construction is fully finished. With a construction home loan from Future Financial you have the flexibility to do this. We will never make a payment to a builder without first seeking your written, signed consent, so you don’t have to worry about losing control over the construction of your home.
Once construction is completed, repayments on the loan will go back to principal and interest.
What kind of documentation do I need?
To make sure your construction home loan is successfully approved and completed, it’s necessary to provide a number of documents.
Before we can approve your loan, we will need to see council-approved plans for the building, along with a fixed-price building contract.
In addition, to this, before the first payment is made to the builder, we will require builder’s all-risk insurance, the owner’s warranty certificate, as well as your signed authority for the payment.
Lastly, upon completion of the project and before the final payment to the builder, we will need to see an occupancy permit and building insurance for the home in your name.
Some lenders may also ask for a final valuation before the last payment is made, along with a final builder’s invoice.
What are the insurance requirements for construction loans in Australia?
Insurance requirements tend to vary from state to state. However, all licensed builders in Australia require Builders Warranty Insurance, which protects the homeowner in case the builder is unable to complete the contracted work. This can be due to anything from bankruptcy to death.
At the same time, you may need to take out public liability insurance on the block of land you hope to construct the property on. Public liability insurance protects you from any financial liability for property damage or injury to a third party on the construction site. This can happen during the construction process or even due to trespassing.
It would pay to check your responsibilities depending on the state you’re in. In Queensland, for example, the homeowner is required to take out such cover on any block of land they plan to build a home on, starting from the date of settlement.
Because interest is only being calculated on the particular sum needed for the stage of construction, repayments cost less and you end up with less interest in the long-term. This can help you pay off your construction loan faster and place you in a better financial decision.
Additionally, the fact that the payment to the builder is only approved once the building work has been satisfactorily completed gives you greater assurance about your property. Typically, a valuer will carry out an inspection of the construction carried out at each stage of the process and, if it meets the acceptable standard, approve it.
Why do people take out construction loans in Australia?
There are a number of benefits to building a home from scratch.
Construction home loans grant you the possibility of creating a property that’s stamped with your particular personality – and one you can unreservedly call yours. When you buy an established home, there’s no guarantee that the space will suit your unique circumstances, such as the size of your family – and nor might it suit your future plans.
But with a construction home loan, you have the opportunity to both design the home specifically for yourself, as well as future-proof it. This means deciding the number of bedrooms, their sizes, as well as the number of bathrooms. After all, no one knows better what your future plans will be than you.
Not only that, but building a home from the ground up allows you to create a property with today’s safety standards and technological features in mind, as well as minimising your future costs. Unlike older homes, which have suffered wear and tear and may require repairs, your new property will likely be in quality shape for some time.
Finally, bear in mind that many of the states’ various first home owner grants are more generous for those building a new home from the ground up, and that stamp duty is typically only paid on the land, rather than the price of construction. Some states even allow new home building grants for buyers who have already bought a house previously.
The case of Terry and Julie from Perth
Terry and Julie are middle-aged professionals who have recently moved to Perth. Terry is an accountant who was born and raised in Adelaide, while Julie is a lawyer originally from London who moved to Australia seven years earlier for a work opportunity.
Together they have one boy of 7 years of age, with another on the way – and they’re thinking about having a third after that. For the time being, they’ve been living in an apartment in the centre of town, but are desperate to get out of the city and into somewhere quieter.
They’ve been looking at different properties in various suburbs, but they can’t find anything in their price range that they’d want to live in. Either they didn’t like the existing decor, the houses were suffering from various issues or they didn’t fit their future plans – Terry, for example, is a film buff, and wants to create the ultimate home theatre system in the living room. This will cost them an arm and a leg if they were to renovate the older homes they’ve looked at.
So instead, they decided to take out a construction home loan and buy a plot of land out in Canning. They’ve paid off the loan on the land price, and the builders are now in the middle of pouring the slab. Best of all, they were able to customise their house from top to bottom, designing it with their growing family in mind – and, of course, Terry’s home theatre system.
Future Financial is your source for construction loans in Australia
If you’re hoping to construct a property of your very own, Future Financial’s construction home loans can make it happen. Contact Future Financial today if you’re ready to take the first step.
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