Construction Loan Guide

When: Tue 21 Mar 2017
Construction Loan Guide

 

How does a construction loan work?

With a standard home loan, all loan funds are advanced at settlement – by paying a purchaser, for example. However, with a construction loan, the Lender will usually retain all of the cost to construct your property (this is usually the fixed price building contract amount). Construction funds are progressively drawn down at each stage of construction. Each progress drawdown is referred to as a “Progress Payment”. Progress payments are made directly to the builder.
If the Lender are only funding a portion of the cost to construct your home, you must contribute your own funds before you can draw down the loan funds. Similarly, funds retained for construction cannot be used towards the purchase of land.
 
Payments you must make during construction

You must make interest payments on your construction loan during the construction period, interest is charged on the funds that you draw down. The Lender will usually contact you before the final progress payment about the payments that you must make after the final progress payments. After construction is completed and the Lender has received all the information required, your loan will convert to a Principal and Interest loan. The construction of your home must commence within 12 months of loan settlement. Construction must be completed within 12 months of first progress drawdown.
 
Once construction is complete

Once your home is complete, your loan will be close to fully drawn, and you will be making payments on the full amount. At this point you can also look at converting your loan to a fixed rate loan, as this is generally not available during construction.
 
If you would like some further information on the construction loan process, please contact one of our brokers here

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