How does a construction loan work?

Building a home can be a big job, but an exciting one for all involved. One of the major aspects though, and one that can cause a little stress for those choosing to build a home, is budget.

Choosing a budget can be tricky, and finances aren't always available exactly when you need them, which is where a construction loan comes in. Never heard of a construction loan, or would like to know more? Keep reading! We have put together all you need to know about them and, if you'd like a little building help, give Symcorp a call today on 07 5594 1768 .

Please note, this article is a guide only and is not designed to replace professional advice. Always speak to a qualified professional before making any decisions regarding loans and complete your own extensive research.

House construction

What is a construction loan?

A construction loan is a financial arrangement designed for those who are choosing to build a home, as opposed to buying an already established home. They are structured in different ways to other loans, to fit the needs of those going through a building process.

Looking for expert help? Contact our experienced Gold Coast Builders today

How does a construction loan work?

Generally, a construction loan has a progressive draw-down, meaning you gradually drawn down on your loan (and increase your borrowing amount) when amounts are needed for constructions progress payments. The amount you can borrow for a construction loan will be partially based on the value of the property you are building, after construction is complete.

A construction loan will usually be interest only over the first 12 months and then revert to a standard principal and interest loan. - Canstar Blue

Progress payments

Construction loans are usually made up of progress payments, after your loan has been approved and construction has begun. There are 5 common progress stages:

Slab down/base down : Helps lay the foundations of the home and covers ground levelling, as well as plumbing and waterproofing of your foundation.
Frame stage : Helps build the frame of your property, including partial brickwork, roofing, trusses, and windows.
Lockup : Helps you build external walls, windows and doors (all the things you need to 'lockup' your house).
Fitout/fixing : Helps with internal fittings and fixtures, such as plasterboards, the part-installation of cupboards and benches, plumbing, electricity, and gutters.
Completion : For the conclusion of contracted items (e.g. builders, equipment) and any finishing touches such as plumbing, electricity, and overall cleaning.

Progress payments are made at the end of each 'stage', once correct invoices and receipts have been provided. A lot of institutions will actually pay the builder directly, taking out the middle man (you).

As the loan is being progressively drawn down, interest and repayments are (generally) calculated based only on the funds used so far. For example, if by the third progressive payment, only $150,000 has been drawn down on a $300,000 loan, interest would only be charged on $150,000. - Canstar Blue

How is a construction loan different to a home loan?

There are a few ways in which a construction loan is different to a home loan:

You do not take out a lump sum at once for a construction loan.
For a construction loan, interest on the whole amount isn't paid from the commencement of the loan.
The amount available is calculated different between the 2 loans.

What do you need for a construction loan?

There are two things that you need a construction loan - land and a builder. You must have vacant land already purchased, in order to generally get a construction loan. The second thing you need it a builder - no builder, no loan!

In relation to other requirements, each financial provider is different, so speak to them in regards to loaning limits and eligibility etc.

Who provides constructions loans?

A huge range of institutions provide constructions loans, including all the big banks in Australia. Speak to your banking provider to find out what options they have on offer but it's also good to look around.