The purpose of a construction loan is to help a borrower build a home on land they own, or to buy the land to build a home. Another reason for a construction home is to pay for renovations to an existing home. This is a standard variable rate loan, so the interest rate on a construction loan is connected to the Reserve Bank of Australia’s rates and to policies and rate structures determined by the individual lender.
More About Construction Loans
A construction loan is designed for borrowers who want to build a home on land they own, buy the land to build a home, or to renovate their existing home. During the construction or renovation process, the borrower only pays the interest of the loan. After construction has been completed, a construction loan converts to a standard loan, with the borrower paying principal and interest in the traditional fashion. A construction loan is a standard variable rate loan, so the interest rate is connected to the Reserve Bank of Australia’s interest rates and to the policies and rate structures of the individual lender. Not all banks offer construction loans, so it is important to consult with a mortgage professional to find out more and to see what your options are. To find out more information on construction loans, please complete the contact form below.
Advantages of Construction Loans
In Australia, home construction is classified into five distinct stages:
1) Base: land excavation and laying of the slab
2) Frame/roof: wall and roof frames are constructed
3) Lock-up: bricks/construction material built onto wall frame, roofing is attached
4) Fixing: HVAC, cabling, cabinetry, etc. is installed, interior walls are started
5) Completion: walls finished, painting, flooring, certificate of ownership
A construction loan follows these stages as well. The loan is paid to the builder in parts after the completion of each phase and after work has been verified. The home owner must authorize payment. This gives the owner the security of knowing the work will be done in a satisfactory manner. Another bonus of this “phase” scenario is that the borrower only pays the interest on the phases that have been completed. Even though the total amount of the loan has been agreed upon, interest is not paid on the portions of the loan that has not been spent yet.
The multi-tiered aspect of construction loans makes this a very attractive economical option. Since only the interest is paid during construction, and even then, it’s only paid on work that has been completed, the home owner does not need to pay out very much at all during the building process. It is only after the home has been completed that the home owner will begin payments comparable to a standard mortgage.
Disadvantages of Construction Loans
The major disadvantage or a construction loan is the amount of paperwork the lender requires. Since the bank is lending money based on something that doesn’t exist yet, they typically want extensive documentation for the home plans. Detailed estimates for work and materials will need to be submitted to the lender and approved, and the bank will need all relevant insurance records and regulatory information as well. The back-and-forth with the lender on a construction loan can be complicated and time consuming for the home owner to be, which could be a drawback for some. For more information on construction home loans and to determine if building a new home rather than buying an existing home is the best option for you, please complete the contact information form below.