Construction loans encompass the construction of a dwelling on a block of land. Many people are unaware that this type of loan is available within most financial institutions. Some lenders refer to construction loans as building loans, or even construction mortgages. Many lenders also give these types of mortgages a particular brand name known to the particular lender’s brand. No matter what they are called, at the end of the day they are loans to construct a property.
What types of loans are available for a construction loan?
There are many different loan types available for construction loans. Hence you can obtain many different loan products when seeking a construction loan. These include:
It does come as a surprise to many when we inform them that you could get a construction loan using any of the above loan types to build a property.
Construction loan more expensive?
Construction loans are not more expensive as some people might think. On the contrary, you could get a building loan at normal home loan interest rates. Further you could get home loan rates discounted like a normal type of property loan.
Do construction loans attract more bank fees?
There some lenders who charge a construction loan fee, and others who do not. It is worth noting though, that not all lenders like or have an appetite for construction loans and hence do not price them very well in comparison to others. Nonetheless, there are other lenders who are have dedicated construction loan teams and hence price building loans like normal loans with all the extra loan features with no extra charge. These would be more desirable lenders to choose from when seeking a building loan.
Maximum LVR you can borrow with a construction loan?
The maximum LVR made available for a construction loan is 97% LVR. There are only a small handful of lenders that lend to this maximum LVR in 2011-2012 financial year. However it is worth mentioning that different building approaches carry different LVR brackets. For example, if you were to take out a loan using a licensed builder the maximum LVR would be 97%. If you wanted an owner builder loan, the maximum you could borrow is 80% LVR.
Can I get a construction loan using a low doc policy?
You can get a construction loan using low doc policy. It is worth mentioning that the maximum LVR for a low doc construction loan will decrease. Hence you could borrow using low doc policy for a construction up to $2,500,000. Some lenders will go as high as offering low doc construction loans to 85% LVR for a licensed builder loan up to $400,000. There are other lenders who will lend up to low doc 70 without the need for LMI. There are many different low doc building loan options and we suggest you give us a call to see where and which policy suits you best as you will not find every aspect that might define your own position strictly reading this web page.
Can I get a construction loan if I have bad credit?
There are a small number of lenders who lend to a borrower with a bad credit home loan. It must be mentioned though, these types of lenders will charge a slightly higher rate due to the bad credit history of the borrower.
Can I get a construction loan if I am a first home buyer?
You can get a construction loan if you are a first home buyer up to 97% LVR. It is important to consider the lender most suitable for a construction loan as a first home buyer as usually has a smaller deposit. Hence one must also consider the cost the lenders mortgage insurance or LMI.
Can I get a construction loan if I was on probation?
You can get your loan approved approved even if you were on probation using a probation home loan. These loans are only available with very few lenders, so its important to be guided by a professional to chose the best lender
How does a construction loan work?
A construction loan involves the financing of payments to construct a property. Construction loans can be fiddly, but if lodged with the correct lender considering the borrowers situation, and with correct documentation in place upfront, the transition is very easy. In many respects when people seek a construction loan they usually involve a licensed builder. Hence a potential borrower would need to provide the lender with a fixed price building cost estimate or fixed price tender or builders quote. A fixed price tender or quote from a licensed builder usually breaks up the cost to construct into a 5 progress payment schedule.
What is a progress payment schedule in a construction loan?
A progress payment schedule is the 5 payment breakdown of the costs required to build the subject property. This is made up of the following:
- Lock up
Different builders could use slightly different terminology to describe the above, but the bottom line is to provide a breakdown of the construction in building stages. At all of these stages mentioned, the builder will give a costing to the particular stage. Hence at every stage of the construction there will be a costing which all 5 stages will add up to the final building price. The builder will determine the cost for each stage of the construction in the progress payment schedule.
How do lenders make payment with a construction loan to the builder?
Payments for a construction loan or mortgage are made using a progress claim form request. So for example once stage 1 is complete, the lender will advance payment for that part of the construction. When the second stage of the construction is complete, the lender will advance the cost for that part of the construction and so on until completion of all 5 stages.
What is a progress payment claim in a construction loan?
During construction, the borrower or the builder will put to the lender a progress payment claim. This is a claim for payment template which is usually faxed to the lender, and the lenders will usually action the claim within 24 hours. This generally comes in the loan offer or supplied by the lender at the time of signing up the loan offer. Our construction loan specialist will be able to show you how to do this when taking your loan application.
What type of paper work does a lender look for before issuing an approval for a construction loan?
To qualify for a construction loan, you must have a building permit. This is commonly known as a Development Approval (DA), and a Construction Certificate (CC). These are received from the council when building plans have been drawn up in accordance with the Building Code of Australia (BCA), and have been approved by council. Further for a construction mortgage to be approved, the lender will be seeking the necessary insurances like builder warranty and public liability.
Once the council work has been completed in order to grant approval, you will approach a lender to raise the finance for the construction. There are 2 building financing methods when taking on a construction loan. As mentioned previously, you could be seeking a licensed builder loan, or an owner builders loan. These 2 types carry slightly different documentation requirements which our construction loan specialists can explain at the time of taking an application.
Further a lender is also looking at determining the general affordability or serviceability position of the borrower. So in this case, the lender will also be looking at the applicant’s income documents or low doc declaration to determine if a borrower can afford the loan.
At Mortgage Providers, we have access and extensive knowledge in putting together construction loans. We know which lenders to use for different types of applicants ensuring that they save in the interest rate, fees and flexibility. When you enquire for this type of loan with us, please request to speak to a construction loan specialist.