What is a construction home loan?
Construction home loans, commonly referred to as construction mortgages, are financial solutions arranged when you are planning a construction project. Construction loans can give you the money you need to pay for building a new home from the ground up, an expansion, or an extensive renovation of your existing home.
The property being built serves as security for the construction loan, which is repaid over time as the project progresses.
Borrowers often need to fulfil several requirements to be qualified for a construction loan in Australia, such as having a solid credit rating, a steady income, and a down payment.
Additionally, comprehensive drawings and specifications for the building project are typically required, along with a cost estimate and a timeframe for completion.
How do construction home loans work?
Loan-to-value ratios (LVRs) for construction-related mortgages are typically variable-rate loans with a maximum LVR of 95%. This differs amongst lenders. Therefore, it’s essential to discuss it with your mortgage broker.
Additionally, lenders frequently include a maximum period limit, typically 24 months, for the total drawdown of your loan. Moreover, you might have to get the land on a separate land loan if you want to wait to start building.
Your lender will require a copy of the building contract/tender and the plans when you apply for a loan. They’ll ask their appraiser to estimate the property’s value upon completion, and they’ll base your loan amount on whichever is lower of the land price plus building costs or the on-completion value.
Some people will even consider future rental income when creating an investment property, which can significantly increase your financing capacity. Like any other home loan, the lender will send you a loan offer to sign and return once your loan has been authorised.
Learn how construction home loans work and start the process of turning your dream into reality. At Mortgage Pros, our team of experts is on hand to help you through the application process. Contact us at 1300 030 388 or fill out our assessment form right away for professional guidance and specialised financing solutions.
What lenders look for when applying
To begin the process, it’s wise to seek a mortgage broker specialising in construction home loans to discuss your financial circumstances and recommend the right lenders. You can
then apply for a construction home loan from your chosen lender, a bank, credit union, or mortgage firm.
Be ready to present all required paperwork, including tax returns, bank statements, income verification, and other financial data. Don’t forget to include financial details on the application, such as your income, assets, and credit history.
Lenders want evidence of a steady income to ensure you can pay interest during the construction period and repay the permanent mortgage. Having a consistent job history might reassure lenders about your financial security.
Then, your chosen lender will require thorough construction plans that include architectural drawings, floor layouts, and specifications. You’ll need a well-documented budget that lists all construction-related costs, from supplies and labour to permits and fees. The more thorough your plans, the better.
Talk to our senior mortgage brokers to understand the construction home loan application process step-by-step.
How can I prepare?
You may improve your chances of approval and ensure a less complicated loan application process by thoroughly preparing for it. It’s critical to keep open lines of communication with your lender during the construction period and to turn in any required papers immediately.
An organised process is involved in applying for a construction home loan to ensure you and the lender know the project’s scope, costs, and loan terms.
Gain approval by being aware of the requirements. Like typical home loans, your lender will consider your income and savings when determining your ability to repay the loan. For a construction loan, you’ll also need a fixed-price building contract, council-approved building blueprints, a copy of the builder’s licence, etc.
Due to the unique features of construction financing, mortgage repayments for a home loan during construction may differ from those for a regular mortgage.
It’s essential to remember that depending on the lender and the type of construction home loan you select, certain aspects of your house loan for construction, such as the terms and conditions, interest rate, and repayment structure, may change. You fully comprehend the
loan repayment procedure and the related deadlines; properly research your loan agreement and work closely with your lender.
After your loan has been accepted, you will start receiving payments. As specified in your building contract, these payments will be made at various building-related checkpoints. Typically, there are six stages to a building project: preparation, slab (or base floor), frame, lock up, fit out, and completion.
Once the final payment has been made, your loan will transfer to the standard house loan or loan package you agreed upon once your lender has inspected the property and requested a few final papers for a final appraisal.
Inspecting your newly built or renovated house, ensures all construction work has been satisfactorily completed before moving in. Check for any remaining tasks or unfinished work, then speak with your builder or contractor to resolve them.
Break new ground with Mortgage Pros
Are you prepared to take on a significant renovation project or start the thrilling adventure of homeownership? If so, welcome! You’re about to embark on a new chapter in your life, and Mortgage Pros is here to help you every step of the way.
At Mortgage Pros, we know that creating your ideal home is exciting. Our construction home loans are available to make the process as easy and stress-free as possible. We’re here to help you realise your vision with affordable prices, flexible terms, and top-notch service.
Get started on your path to a better future by getting in touch with Mortgage Pros right away.
Frequently Asked Questions
How much deposit should I prepare to qualify?
We recommend you continue saving throughout the construction phase and postpone making significant (and unnecessary) purchases until the project is finished.
Generally speaking, we work to get you approved for a marginally more considerable loan amount. You then need to maintain this financial health throughout the life of your loan. This will guarantee that there are ample resources available. Nothing is worse than running out of money just as your house is about to be finished!
Can I extend the loan for additional work?
Extending a construction loan for extra tasks or expenses throughout the building or restoration process is possible. However, extending the loan will be subject to several conditions and require the lender’s consent.
We can usually convince the bank to raise the loan amount if you submit a formal written estimate for this job. Whether or not this will be achievable relies mainly on the nature of the work and the lender we’re dealing with.
Can I combine a construction loan with a guarantor loan?
It might be particularly challenging to arrange a construction and a guarantor home loan. Most loan systems can’t handle this combination, leading to delays and mistakes. We have a few lenders that can accept this type of loan, so please talk to us about it!
I’m buying the land and building on it. Should I get separate loans?
If you’re purchasing land, you might think about dividing the loan into a “land loan” and a “construction loan” so that they will be advanced at various intervals. If you don’t do this, you must pay the whole amount due when the land settles.
When the land is settled, LMI may be charged. Your broker will speak with the lender to validate their procedure and determine when you must submit your deposit.
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