A construction loan is the most sensible, and often the only option when looking to build your own home. More and more Australians are building their own homes, it is generally cheaper than attempting to purchase and you have much more control over the size and layout of your dream home.
You can also take the opportunity to incorporate many green features, such as solar panels, smart heating systems, and even ecological building materials.
But, although this is generally the cheaper option, it’s not free! You’ll need some funds upfront and access to the remaining funds.
What you’ll quickly discover is that you need development finance partners that specialize in construction finance. Your mainstream banks and mortgage providers are not keen on lending funds for something that isn’t yet built.
If you’re considering a construction loan then you should understand the following:
The Deposit
Just like purchasing a home you’ll need a deposit, this is so that not all the risk is with the lender. The amount of the deposit will depend on the lender but you’ll typically be looking at between 5-10% of the build cost.
This will need to be given to the lender as part of the funding process.
The Funds
Unlike a traditional mortgage, a construction loan is usually released in 5 stages, although there can be more, or less, stages.
The idea is that funds are only released to cover each stage, which reduces the risk to the lender. The 5 stages are:
- Foundation
The first stage is creating the slab, foundations, or base that the house will sit on. However, this stage also includes purchasing the land and getting your application through planning regulations. Some lending firms may insist that the planning permissions are confirmed before any funds are released.
- Frame
Once the foundations are done you’ll get the funds to create the frame. This is when the house will start to look like a home, although it won’t have walls, just a wooden frame.
- Lock It Up
The most significant part, and potentially the biggest funds release, is stage 3. During this part of the build, the house has to go from being a frame to looking like a completed home. This means the walls go up, the windows, doors, and roof are fitted, and you’ll have the electrics and plumbing in position.
In addition, all the internal walls will need to be erected. In short, your house will really start to look like a home.
- Fitting Out
The 4th stage includes adding kitchens, bathrooms, finishing the plumbing and electrics and all the internal wall surfaces. The house would be theoretically liveable at this stage, although not finished.
- Completion
Finally, the internal decoration is done, completing your dream home. This stage usually includes landscaping the yard.
Repaying The Funds
It is important to note that the construction loan is for the construction of your property. Once you’ve completed the build you’ll have a set amount of time to obtain a mortgage and find the funds to repay the construction loan.
