CONSTRUCTION LOANS

Why Get a Construction Loan?

Unlike standard home loans, construction loans can be structured in a way that assists with cash flow during the build. They offer more intelligent repayment options such as interest only and with some lenders Principal and Interest rates on interest only, which are normally higher. The construction loan draws down in stages, allowing you to manage repayments throughout the course of the build and save money.

They can also be structured in a range of different ways depending on your needs, with options for split loans such as land and house, this can allow you to fix the land at a lower rate and keep the build variable. Most banks that provide a construction loan will pay the builder with progress payments, you will only be required to pay the interest at each stage of the loan’s drawdown. You are able to make extra repayments if you can afford too. No matter the size of your project, a construction loan can give you great benefits.

Construction Loan vs Home Loan

  • Construction Loan

    A construction loan is a great option for owner builders. If you’re planning on building, whether that’s building on empty land or knocking down and rebuilding, a properly structured construction loan can make the entire process smoother and even give you more value than you originally planned for. Owner builder does have its differences to a licenced contracted builder, which may require certain retained funds as well as lower borrowing limits due to inherent risks of going over the project budget.

  • Home Loan

    A regular home loan functions as you would expect a loan to at settlement for an established purchase the bank will provide the vendor with the funds and you with the debt.

Progress Payments Explained

The main draw of a construction loan is the ability to fund your construction through ‘Progress Payments’. Your loan is structured in a series of payments that are paid out to you at each stage of construction, each of which can come with different interest terms and other changes. At each stage, your builder will send off an invoice once the stage is completed. It is recommended to seek out an independent building inspector to monitor the work from an unbiased 3rd party. The invoice will be sent to your broker who will check and organise for the progress payment funds to be paid out to the builder via the bank according to the building contract schedule.

There are usually 5 stages of construction: the Slab Stage, the Frame Stage, the Lock Up Stage, the Fit Out Stage, and the Completion Stage, with each paying out the appropriate funds for the stage as decided upon before taking on the loan. The initial deposit paid to the builder is normally incorporated into the slab stage which is usually between 2.5% – 5% of the contract amount.

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info@b3finance.com.au

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