Construction Loan

If you are looking to fund your construction projects or invest in renovation, a construction loan is perfect for you; however, they can be a hassle. So, let’s understand what construction loans are, what their requirements are, and how Home Loan Experts can help you get one.

What Is A Construction Loan?

A construction loan helps you fund different stages of your construction project.

Instead of borrowing one lump sum to finance your property, as in a traditional home loan, you can opt to get funds as your construction reaches different stages.

You pay interest only during the construction, which means you pay interest only on the funds you’ve used.

Once construction is finished, most lenders convert the loan into a standard principal-and-interest mortgage, either automatically or upon request.

Types Of Construction Loans

Construction Loans come mainly in four types:

• Standard Construction Loans: These loans are the most common. Funds are released in progressive payments across the five construction stages: slab, frame, lock-up, fit-out, and completion. During construction, you pay interest only. After construction, the loan converts into a principal-and-interest home loan.
• Owner-Builder Construction Loan: If you are your own construction contractor, an owner-builder loan might be a great option. The only caveat is that these loans are more challenging to qualify for and most lenders require a 30-40% deposit.
• Fixed-Price Construction Loan: A fixed-price construction loan requires a fixed-price building contract with a licensed builder. This type of construction loan protects against cost overruns but may have less flexibility for changes. Lenders prefer this option, as it reduces financial risk.
• Turnkey Construction Loan: These loans fund properties that are fully completed by a builder before settlement. The loan is fully funded at settlement and buyers typically pay a deposit upfront, with the balance due on completion.

You can also get a low-doc construction loan or a construction loan with a guarantor.

• Low-Doc Construction Loans: These loans are suitable for self-employed borrowers with limited financial documentation. They require a larger deposit and have higher interest rates. Not all lenders offer this option for construction.
• Guarantor Construction Loan: These loans allow your family members, usually parents, to use their equity as security. If you are a first-time home buyer, this loan can be suitable for you, as it reduces the deposit requirement and may also help avoid Lenders Mortgage Insurance. You can even remove the guarantor and convert this loan into a standard home loan once you have enough equity.

Who Can Apply For A Construction Loan?

You can apply for a construction loan if you are:

A First-Home Buyer

If you are a first-home buyer, you must make a deposit of at least 20%, or as low as 5% with Lenders Mortgage Insurance (LMI). You may be eligible for a First Home Owner Grant (FHOG) or stamp-duty concessions in some states.

An Existing Homeowner (Upgraders and Renovators)

If you already own a house and want to upgrade or renovate it, you can use equity in your existing home as a deposit. For structural renovations, however, you may need council-approved plans.

An Investor Or Developer

Some lenders may also require a higher deposit (around 30%) for investment builds.

A Self-Employed Borrower

If you are a self-employed borrower, you can apply for a low-doc loan if you have an ABN, GST registration, and financial statements. You typically need a larger deposit (20-30%) due to variable income.

An Owner-Builder

Some lenders accept owner-builder loans, but they require:

• Strong financial standing.
• A detailed construction plan and cost estimates.
• A builder’s licence or relevant trade experience.

Owner-builder loans require a higher deposit (30-40%).

People Using A Guarantor

A family member (usually parents) can use their home equity to secure the loan for you. It helps reduce deposit requirements and may allow you to avoid LMI.

Who May Struggle To Get A Construction Loan?

• Applicants with bad credit history
• Applicants with unstable employment or irregular income
• Borrowers with no deposit or minimal savings
• Owner-builders without sufficient experience (some lenders don’t approve them).

Requirements For A Construction Loan

• A fixed-price building contract with a licensed builder
• Council-approved plans and permits
• Proof of income (PAYG payslips or self-employed financials)
• Deposit (usually 20%, but some lenders allow 5% with LMI)
• A good credit score to secure lower interest rates.

How Does A Construction Loan Work?

Construction loans work differently than standard home loans.

They charge interest-only repayments throughout the construction process, which is divided into stages such as slab down, frame, lockup, fit-out and completion.

This method of loan disbursement is called ‘progressive drawdown’.

Let’s take a detailed look at this process.

Credit Score And Financial Stability

Applying for a loan requires you to have a good credit score and financial stability. Since lenders check your existing debts, credit cards, and loan repayments, you need these documents to improve your loan approval chances.

Proof Of Income

You now need to show proof of income and employment. If you are a PAYG employee, you can use your recent payslips and tax returns. For self-employed employees, you can go with business financials, ABN, GST registration, and tax returns.

Loan Pre-Approval

Before construction starts, lenders provide a pre-approval based on your financial situation. This ensures you have funding secured before signing contracts.

Deposit And Equity

You typically need to deposit 20% of the total project cost. Some lenders accept 5-10% with Lenders Mortgage Insurance. If you are an existing homeowner, you can use home equity instead of a cash deposit.

Fixed-Price Building Contract

Next, you need a fixed-price building contract from a licensed builder. This contract outlines the total construction cost, timeline, and scope of work.

Council-Approved Building Plans And Permits

You also need proof from the local council of approval for your design and construction. This ensures compliance with zoning laws and regulations.

Builder’s Insurance And Home Warranty Insurance

The builder you chose for the construction must have public liability insurance and construction insurance. In some states, Home Warranty Insurance is also required, for protection against defects.

Progress Payment Schedule

Construction loans are paid in stages based on completion milestones:

• Slab Stage – Foundation laid
• Frame Stage – House framework completed
• Lock-Up Stage – Windows, doors, and roofing installed
• Fit-Out Stage – Interior fittings, electrical, and plumbing done
• Completion Stage – Final inspections and handover

After each stage, lenders will send a valuer to check the work before releasing the next payment. Note that you still need to pay the deposit initially (similar to other loans).

Benefits Of Using A Mortgage Broker For A Construction Loan

As your mortgage broker, we can provide you with multiple benefits. Here are some:

Access A Range Of Lenders

At Home Loan Experts, we aren’t tied to a single financial institution. Instead, we have an established relationship with 50-plus lenders, allowing us to find options that suit you.

Our brokers can help you find lenders that specialise in construction loans, which increases your chances of loan approval.

Receive Personalised Guidance And Support

At Home Loan Experts, our expert brokers not only provide you with personal guidance, they also take time to understand your situation so they can help you structure your loan effectively.

Get Expert Help

Construction loans are complex, as they require progressive payments, variations to building plans, and specific documentation.

A skilled mortgage broker with expertise in construction loans will help you avoid pitfalls on your way to getting a home loan.

Negotiation Of Better Loan Terms And Rates

Brokers have a tremendous amount of negotiating experience. Since we deal with multiple lenders on a regular basis, we have a good understanding of current market rates.

So, we can use this knowledge to negotiate on your behalf, potentially securing you a lower interest rate, reduced fees, and more favourable loan conditions.

Saves Your Time And Effort

Researching, applying for, and managing a construction loan can be an incredibly time-consuming process. Mortgage brokers take all this grunt work off your plate.

We gather your financial information, research suitable loan products, prepare and submit your application, and manage communication with lenders.

Handles Paperwork

With a Home Loan Experts mortgage broker, you get the required documentation promptly. We ensure your application is complete and accurate with thorough documentation to increase your chances of loan approval.