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All you need to know
What is a construction home loan?
As one of Australia’s most awarded non-bank lenders, Mortgage House has a range of loan and mortgage finance options whatever your property goals. We proudly focus on providing all our customers with loan, product and service outcomes that are tailored to their exact needs. When you decide to buy a block of land and build a home, Mortgage House has a range of options available to you. One of the most popular kinds of home loans available to those who build a house in Australia is a construction loan. A construction home loan is similar to a regular loan. Interest rates don’t work any differently, with both fixed rate loan and variable rate options, and the fees and charges are also likely to work the same way. But there is one significant feature that makes construction home loans attractive if you’re planning to build a house. A construction home loan allows you to stagger the payments to your builder once the agreed development stages have been met. This is important because you will only be charged interest on the amount you have paid out, a feature that can save you money and keep you as the borrower in the driver’s seat. Once your home has been built, the loan will revert back to a standard variable home loan. A construction home loan is available to owner-builders – those who build a home on their own block of land – or a registered builder. When you’re working out whether a construction home loan is suitable for you, there are a range of variables to consider including:
- Funds will be paid to you in drawdowns ensuring you only pay interest on the portion of the mortgage you have used.
- Benefit from the option to make interest-only payments for the land portion prior to and during the construction process.
- You have up to 24 months to complete construction after settlement of the land, giving you the chance to plan things out when building your dream home.
- The loan may be split between two accounts after construction is complete to identify personal and investment debt for visibility.
- If you’re an owner builder, the maximum loan-to-value ratio will be 50% which is less than standard home loans.
- Funds are released only at predetermined stages after proof of work has been established, which means that timelines and quality building standards will need to be met.
- There can be a number of terms and conditions which should be clearly understood before committing to a construction loan, including having council-approved plans and a fixed price tender at the time of application.
That last point is one worth remembering. With regular loans, you may be able to secure pre-approval for your home loan based on the likely amount you will pay for a home. However, construction loans can come with a few more terms and conditions. None of them are really arduous, but they are worth noting. The main one to note is that when you apply for a construction loan, the bank or lender will want to see you already have plans that have been approved by the local council, and you have a fixed-price contract for your new property. It is always good to demand a fixed-price contract when you build a home. Not only can it help you with your construction loan application, but it can also ensure there are no hidden costs and overruns as you get further into the build. Our team of expert lenders are on your side and can help you determine the viability of your plans to choose a construction loan.
How to get a construction home loan
The process for being approved for a construction home loan doesn’t differ that much than from a standard home loan. Like regular mortgages, there are two main types of home loans:
- Owner-occupier home loan. An owner-occupier home loan is a mortgage for those who intend to live in the property they are looking to buy. In the case of a construction loan, an owner-occupier mortgage is for those who aim to build a house on a block of land, and live in the property, or have it as their main place of residence.
- Investor home loan. An investor home loan is a mortgage for those who want to build a home for investment purposes. The aim is to rent the property out, and then sell it for a profit at a later date. Interest rates for investment home loans, including investment construction loans, will be higher than comparative owner-occupier home loans.
The main difference, as mentioned earlier on this page, between applying for a regular mortgage and a construction home loan, is in the handful of terms and conditions that most banks and lenders will demand. The main two are to that you already have council-approved plans for you to build a home on your block of land, and that a fixed-price contract for the build.
When you apply for a construction home loan, or any other type of mortgage, there are a few things you will need to get ready in advance. At Mortgage House, we want you to benefit from our decades of experience of finding suitable home loans for Australian families, including those who decide to build a home on a block of land. We have developed an easy-to-understand checklist to help streamline the application process for you. That checklist covers things such as:
- Proof of ID. Banks and lenders will want you to prove you are who you say you are, so you will need ID such as a driver’s licence, proof-of-age card, a boat licence or other relevant ID. If you only have one form of photo ID, you will also need to supply a secondary form, such as birth certificate, citizenship certificate, pensioner card, Medicare card or utilities bill.
- Income. Proving your income can be simple when you’re looking for a home loan to build a house. Ideally, it is always good to supply the bank or lender with your past two payslips, or a letter from your employer outlining how long you have worked there, what your gross and net income is and whether you work any regular overtime or receive any allowances. If you are self-employed, your past two income tax statements are always preferred, and having you latest tax assessment notice can also be important.
- Expenses. This one is pretty clear. Banks or lenders will need as much detail as possible about your expenses, everything from the weekly shopping bill, to school fees, utilities and how much you spend on takeaway.
- Assets. Bank statements for the previous three months, the details of any shares or superannuation and proof of the value of your car or home contents is the kind of thinks banks and lenders look for when it comes to your assets.
- Liabilities. If you have a current mortgage, you will need to provide a minimum of 3 months of loan statements. You will also need to provide the most up to date statements for your car or personal loans and credit cards or store cards.
If you are unable to meet all the documentation requirements, there may still be a Mortgage House loan solution for you. Feel free to get in touch with one of our lending specialists for confidential advice. Find more information in our mortgage tips checklist.
How do construction loans work?
Making the decision to build a home is exciting. From the very start you can create your dream home, choosing the block of land and every detail through to the top of the roof. You can stamp your personality and your vision on your creation. Finding the right home loan to create your dream is what Mortgage House is all about. Our construction loans can be a suitable option for you and your family, if your dream is to build a home, or if you want to renovate. Construction mortgages can offer you flexibility and staged payments to make things a little easier. With a fixed-price contract from your builder, a construction loan means we will make payments at various stages of the building process. The repayments are not made until certain milestones have been met and interest is only charged on what we have paid out, not the overall loan amount. Once your home loan application has been successful and your land has been settled, you will have fixed period to complete construction (generally 24 months). Another thing to remember is you will need council-approved plans and a fixed price contract before you apply for construction mortgages, and there are usually a few more terms and conditions with construction loans for new builds in Australia if you are an owner-builder. Our construction loans also have a range of features that benefit you whether you’re building a home for yourself, having it built to live in or constructing an investment property, including:
- Additional repayments: No matter what your interest rates are, additional repayments can save you thousands of dollars over the life of the loan and Mortgage House encourages this on our tailored construction loans.
- Redraw: When you build a home, you often need extra money, even once the house is built, for things such as landscaping, fencing or laying a driveway. That may make you baulk at making additional repayments. With a Mortgage House construction home loan, you can have the best of both worlds. You can make additional repayments and redraw any extra payments you have made, whenever you want and for whatever reason you want.
- Offset facility: An offset facility can also help you save money. You can use a non-interest-bearing bank account to offset the interest on your construction loan. Interest is charged on the difference between the two amounts, saving you money in the long run.
What are the interest payments on a construction loan?
When you build a house, and you are searching for a construction loan, interest rates are likely to be at the forefront of your mind. When it comes to interest rates, Australian banks and lenders have two types of home loans on offer:
- Variable rate loan. The interest rates of a variable rate loan can increase or decrease over the life of your loan, based on a range of internal and external factors. Interest rates of variable rate loans are likely to be lower than a comparative fixed rate loan.
- Fixed rate loan. A fixed rate loans means your interest rates will be fixed for an agreed period, usually up to 5 years. That means your monthly repayments will stay the same over the agreed fixed period, making budgeting easier.
A good way to compare construction home loans when you are searching for the best interest rates is to understand how comparison rates work. Comparison rates take into account fees and charges and give you an indication of how one home loan compares to another.
When you build a house, details can be everything. From choosing the block, to choosing the façade, to choosing the intricate interior options. And details of construction loans are also important. Having an idea of what the repayments can be over the life of the loan, including how much of it might be interest, is an important detail of building your dream home and feeling in control financially. Our mortgage calculators can do that for you. While they are only a guide, they can give you a good indication of how to calculate construction loans to show how much your repayments may be at the current interest rate level, or if you have a variable loan and the rate increases. They can also help you compare repayments of different loans, work out how much you might be able to borrow, and even how much Stamp Duty you may pay. This can allow you to plan for the future, with a lot of information at your fingertips.
How much deposit payment is needed for a construction loan?
Alongside interest rates, how much you pay for a deposit is one of the top questions people ask about when considering a construction home loan. At Mortgage House, we have a range of different options that require different deposit amounts. How much down payment you need to make will depend on which construction loan you choose, and also whether or not you are prepared to take out Lenders Mortgage Insurance.
The way to identify how much deposit you need is by looking at the loan to value ratio of your home loan. The higher the construction loan deposit you put down, the less your loan will be, which can put you in a position of negotiating lower interest rates and other features that can help you pay off your mortgage sooner. Most banks and lenders require a construction loan deposit of 20%, meaning your loan to value ratio will be 80%. The loan to value ratio is the percentage amount you are borrowing compared to the value of the property. A loan to value ratio can also help you calculate your prospective price range. If you have $50,000 in a savings account, and you are determined not to have a loan to value ratio of more than 80%, then you know the maximum property value you can afford will be $250,000. The word “maximum” suggests that some construction loans can have a higher loan to value ratio. This is where Lenders Mortgage Insurance comes in. By paying Lenders Mortgage Insurance, you can achieve a loan to value ratio of up to 95%. Lenders Mortgage Insurance is an extra fee, but you can add it onto your loan amount and pay it off over the life of your loan. Feel free to get in touch with one of our lending specialists to calculate construction loan deposit amounts, interest rates, LMI, LVR and other important financials to help you make the best decision. Find more information in our mortgage tips checklist.