A construction loan works differently from a regular home loan with the purpose of building a house.
The total loan amount is determined and agreed upon in advance, but it is disbursed following a pre-established schedule. Essentially, the lender releases funds in stages, corresponding to the completion of specific construction milestones. This structure offers a significant advantage to the investor as interest payments are made solely on the portion of the loan that has been released. In other words, you only pay interest on the amount you have utilized so far. Click here for FAQ – Construction Loans.
Construction financing is necessary for a number of situations and can be used to either finance your dream home or an investment property, extension, or renovation projects including:
To be eligible for a construction loan in Australia, borrowers typically need to meet certain requirements, such as having a good credit score, a stable income, and a deposit. It is also usually necessary to provide detailed plans and specifications for the construction project, as well as a budget and timeline for completing the work.
Construction Loans Consist of Six Stages
Stage 1: Clearing Of The Site
Depending on the nature of the land, there may be soil testing, site-leveling and clearing undertaken prior to actual construction.
Stage 2: The Slab Or Base Stage
As the name suggests, this is simply when the foundation is laid. It includes measuring out the design on the site, pouring the footings, under slab drainage, moisture barrier, and special mesh for termite protection.
Stage 3: Frame Stage
This includes the installation of your internal and external support structure, along with walls, the conduit for electrical and plumbing, the roof frame and sheeting, gutters, and insulation.
Stage 4: Lockup Stage
It’s at this point where you can literally start “locking up” the property because your windows, doors, and the remaining walls will be installed.
It’s also safe for plumbers, electricians, cabinet makers, and other tradesmen to begin fitting out the property.
Stage 5: Fit-out Or Fixing Stage
Plumbing, electrical (including lights and powerpoints), and other fixtures and fittings will be installed.
The design features that make the property a home will also be added such as cornices, tiling, cabinets and shelving, reveals, and architraves.
Stage 6: Practical Completion Stage
This is basically where all painting, installations, and detailing have been completed and you’re effectively ready to move in.
While the amount of finance required will be agreed upon upfront, it is only released in line with a pre-determined timetable. Effectively, the lender will release tranches of financing as each stage of the build is completed. For the investor this has the benefit that interest payments are only made on the portion of loan released – you only pay interest on the amount you owe.