Residential Construction Loans – How To Get A Loan To Build Property

A residential construction loan is a certain type of mortgage that comes specially designed for people who want to build a new home. Depending on how you set your residential construction loan up, it may allow you to buy a vacant area of land first. Then, you can use the loan to build your new home on the lot of land within a set time period. You can also choose to apply for a construction loan if the property already has a dwelling built on it. Part of the construction process will involve knocking it down to start fresh.

Defining a Residential Construction Loan

A residential construction loan is a short-term and interim loan that helps you afford to build your home. The lender pays out your money in set stages as they can see progress happening with the build and mitigate any risk. The duration of this type of loan is usually a single year or shorter (subject to the build contract), and they typically have variable interest rates that fluctuate up and down with your mortgage’s prime rate. 

 In order to gain approval for this type of loan, your lender will request the normal home loan application documents such as asset and liabilities, income proof etc., however also require construction supporting documents which are council approved plans and specifications, signed and dated building contracts, quotes (if applicable) and a Quality Surveyor Report for projects greater than one million dollars. 

How Residential Construction Loans Work 

Residential construction loans are set up a little differently than a traditional mortgage. First, the lender will consider the amount of money you have to borrow to pay the contractors to construct your home, if you have a builder engaged, the loan amount will be subject to the final price noted on the builder’s contract. Then, they break down the total amount into payments. These payments are progress draws. They equal a percentage of the total building contract amount that will pay out from your loan at set times during the construction process. These progress payments get split into stages rather than released all at once, this helps mitigate the risk of overspending on the build and running out of money.

While you pay your builders with periodic progress draws, many financial institutions will expect you to pay just the interest on the funds that has been drawn down, you only pay interest on what you have used. You also won’t start making full principal and interest payments on your mortgage until all the funds have been drawn down. This keeps your costs down during the build, as you’ll only be paying the interest on what you owe and won’t start paying the principle until the build is complete.

The lender is usually the one responsible for delivering funds to your builder when you request them. Your broker will usually assist in requesting a draw down, essentially whenever a stage has been complete, you request a draw down from the lender. The lender will want to see invoices from the builder confirming what has been spent and will also send an inspector to site to confirm works complete. Once confirmed, the lender will release the funds for the next stage for the build to resume.

Do I Need A Deposit ?

You’ll need to establish with your builder when shopping around what type of deposit they require to engage their services prior to commencing. Once you have all your paperwork ready and are ready to start your build, the lender will order an ‘as if complete valuation’. This is essentially what the value of the completed project will be. Lenders will usually prefer to lend up to 80% of the as if complete value, however we also have lenders who will lend up to 95% of the as if complete valuation.

Residential Construction Loan Building Stages

The residential construction loan building process typically follows a five-stage building plan. Once you get approval and the construction process starts, your lender will start making progress payments. Note, the lender will usually follow your builders progress payment schedule however use the below as a rough guide, the stages include:

Stage One – Base or Slab Down

This installment covers the building costs associated with the base of your home. It includes laying out the foundation, leveling the ground for the foundation, installing your plumbing and waterproofing everything. It can take from a few weeks to complete this process from start to finish.

Stage Two – Frame

The second stage involves the lender paying for any expenses you may have during the frame building process around your property. The builder traditionally focuses on constructing the roof, trusses and any windows your building may have.

Stage Three – Lock-Up

This is the most expansive part of the entire building project. The lock-up phase is where the builders focus on constructing the elements that’ll close in your property. Your contractors will make your doors, external walls and insulate the entire thing against the elements.

Stage Four – Fit Out or Fixing

Your lender will pay for all of the fittings or fixtures you need to complete your project. They include cabinets in the bathrooms and kitchen, shelving and internal cladding. The builders will also use this stage to finalize the electrical and plumbing systems.

Stage Five – Completion

The completion stage is the final process of any building project. It encompasses all of the smaller finishing touches your builders have to do to make the dwelling habitable. They’ll do all of the painting, wall polishing, fence installations, polishing floors and general cleanup of the site. This can take anywhere from a few weeks to over a month, depending on the scope of the project. 

Contact Us Today!

Are you ready to build the home of your dreams with a residential construction loan? Maybe you have questions, concerns or you’re not sure if this is the best choice for you. Whatever the reason, you can reach out and get in touch with our staff today. We’re happy to help you in any way we can! Contact us on on 02 9121 6247 or submit your scenario online.