A construction loan is a good option for those planning to build or rebuild their own home or investment property. In general, construction home loans have a variable rate started with interest only repayments then switch to principle and interest repayment at completed of the constructions or final drawn of the loan.
The difference between a construction loan and a normal home loan is funds are disbursed throughout the construction process progressively at each stage vs a normal home loan funds are made at a lumpsum amount.
While a construction loan lets you draw on the loan balance when payments need to be made to the builder. These payments are made at key stages of the building process and are known as progress payments.
While work is still in progress, you will only be asked to make interest repayments on money that has been drawn down. This means you will only be paying interest on money that has been used. Therefore, repayments will be smaller at the start of your loan and will increase gradually as your construction project approaches completion.
Like traditional home loans, lenders will assess your capacity of repayment. However, additional documents will be needed for a construction loan such as a fixed price building contract, building plans approved by council or private certifier, homeowner warranty insurance and builder licence etc.
Once your loan is approved, mortgage documents signed and offer accepted. Draw down via funds will be provided in a series of payments. These will be made at various milestones of the building process, outlined in your building contract. The six stages of construction are typically the preparation, followed by the slab (or base floor), frame, lock up, fit out and finally, completion.
Before making the last progress payment to your builder, your lender will inspect the property and need a few last documents for a final valuation. Once the final payment is made, your loan will switch to the standard home loan or loan package that you have agreed upon.
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