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What is a construction loan?
A construction loan is a type of short-term financing designed specifically for individuals or businesses constructing a new property or undertaking significant renovations or improvements on an existing property.
Construction loan vs home loan: what’s the difference?
The main difference between a construction loan and a traditional home loan is how funds are dispersed.
Regular home loans will generally provide funds in one lump sum and borrowers will begin principal and interest payments from the settlement date.
However, construction home loan funds are released gradually throughout the building process, and borrowers will typically make interest-only payments during this time.
This means that rather than receiving your loan amount in one lump sum, you will receive funds in instalments at various stages of the construction process. These payments are called ‘progressive drawdowns’ or ‘progressive payments’. During this time, borrowers will typically make interest-only payments, meaning they will only pay the interest on the funds they have used so far.
For example, imagine your total loan amount is $300,000. If your first instalment is $100,000, you will only pay interest on $100,000, not the full loan amount of $300,000. Then, if your second instalment is $50,000, you will then begin paying interest for $150,000.
How to apply for a construction loan?
Typically, applying for a construction home loan is a different process than that of a standard home loan. Many lenders will require borrowers to have engaged a builder and to provide the lender with detailed plans, cost estimates, and other documentation. The lender will then evaluate the feasibility of the project and whether they will approve the loan.
Confused about how to get started? Speak to our team of friendly mortgage brokers today! Our dedicated team will walk you through the loan process every step of the way and ensure you get the right construction home loan for you.
What is the best type of construction loan?
Deciding what is the best type of construction loan for you will depend on your specific needs, individual financial situation, and your preferences. It’s a good idea to consider the below factors before making any decisions.
Interest rates
Consider whether you prefer a fixed or variable interest rate. Fixed rates provide stability, while variable rates may start lower but can fluctuate.
Loan terms
Evaluate the duration of the loan. Construction loans are typically short-term (6 to 18 months), while regular mortgages have longer terms (15 to 30 years).
Deposit
Ensure you understand the deposit requirements. Typically, most lenders require borrowers to have a 20% deposit, or the lender may charge lenders mortgage insurance (LMI).
Lender requirements
Different lenders may offer variations of construction loans with different terms, rates, and eligibility criteria. Compare options from reputable lenders.
Your role in construction
Consider whether you plan to hire a general contractor or act as an owner-builder. Some loans are better suited for owner-builder scenarios.
Before choosing a construction loan, consult with lenders, understand the terms and conditions, and consider seeking advice from a financial professional, like our team at Oceania Finance. The best type of construction loan for you will align with your specific project, financial goals, and preferences. Our experienced mortgage brokers have access to a wide range of lenders and can negotiate on your behalf to achieve the best results for your financial goals.
Need to finance the build of your dream home? Speak to an expert!
At Oceania Finance, we’re experts in finding the right home loan solution for our clients. We listen to your wants and needs, and your future goals so we can provide a personalised, stress-free experience. So if you’re ready to build your dream home, contact us today!
Construction Home Loan Frequently Asked Questions
If you haven’t used a finance broker before, you probably have some questions. Let’s help you get some answers.
Can construction loans be fixed?
Construction loans can have fixed interest rates, and these are commonly referred to as “fixed-rate construction loans.” In a fixed-rate construction loan, the interest rate remains constant throughout the loan term, providing borrowers with predictability and stability in their interest payments.
Can construction loans be refinanced?
Yes, construction loans can be refinanced, but the process and options available may differ from refinancing a traditional mortgage loan. Because construction loans are generally more complicated than traditional home loans, refinancing can require more documentation and a more complicated process.
Can construction loan interest be deducted on taxes?
If you are building an investment property, then interest on construction loans may be tax deductible. However, it is important to confirm what deductions you are eligible for with your accountant or with the Australian Taxation Office (ATO).
Does a construction loan include appliances?
A construction loan typically covers the costs directly associated with the construction or renovation of the property itself, including labour, materials, permits, and sometimes land acquisition. Appliances, furnishings, and other personal property are generally not considered part of the construction costs covered by the loan. However, there are some exceptions, depending on the type of construction loan and the lender’s policies.