How do construction loans work?



When you decide to build an investment property, finance is a key consideration. However, construction home loans can become unnecessarily difficult to understand, making the process appear frustrating and time-consuming.

Blogger: Don Crellin, managing director, Resolve Finance 

If you decide to undertake a construction loan, there are a number of key aspects to consider.

• Most builders will want to see a pre-approval letter before they undertake any drawing or costing of plans to ensure that you are able to service the loan size of the home you wish to build, so it is important to discuss this with your broker to give you the best idea of your budget when you start looking.

• Once you have your pre-approval, to gain formal approval lenders will need to see council-approved plans and a fixed-price building contract.

• Once the loan has been formally approved, documents are signed and the drawdown process can commence. The benefit of a construction loan is that you as the client are only charged interest-only payments that increase at specific milestones throughout the build. This saves you money as you are not paying principal and interest on the completed product when you physically are not able to live in the dwelling.

Generally, the milestones are as follows:

• Slab down and complete
• Frame-up complete
• External brick work complete
• Lock-up stage
• Practical completion

Once the home has been complete, the loan is redrawn over to a standard mortgage and, unless otherwise arranged with your lender, you will begin paying principal and interest on the loan.

Read more: 

Where to find 40%-plus growth 

5 tips to maximise your buying power 

Your guide to buying and selling this spring 

Don Crellin

Don Crellin

Don Crellin is the Managing Director of Resolve Finance, an award-winning mortgage brokerage and leader in the home finance field. Resolve Finance is part of the Alcock Brown-Neaves (ABN) Group and, on average, help over 200 homebuyers into their home each month; financing over 23,000 homes since establishment in 1997.

Don brings a wealth of knowledge and experience to the company having over 25 years in the mortgage industry, spanning across Australia and New Zealand.

How do construction loans work?
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