The Complete Guide To A Construction Loan
06 / 05 / 2020
Sometimes you just can’t find the right home, so you opt for the obvious solution – build your own. It can be an exciting time building your dream home from scratch and watching (or even helping) every completed step lead closer to the final product. But financing such a project can be a bit tricky if you don’t have the cash just lying around. That’s where a construction loan comes into the mix. Today’s blog is going to be concentrating on this specialised type of loan and all the affiliated elements of it such as progress drawdown reports.
What is a construction loan?
A construction loan is a special type of loan that’s targeted directly at people who are building their own home. It is quite different from a standard home loan which is structured around purchasing existing homes. A construction loan, however, has some added features that suit the construction process – namely, progress drawdowns or progress payments. This element allows you to manage the financial side of your construction project a lot smoother and with less hassle.
What are progress drawdowns?
Progress drawdowns are where your lender releases small amounts of funds to you in increments as they’re required by the builder. When each amount will be released is established by a progress drawdown report prior to the construction commencing. This report must be approved by the lender and will outline the project’s timeline.
This is the key difference between a standard home loan and a construction loan. It allows for more control to be had over the funds since small amounts are allocated at each interval – as opposed to a large sum being released to you at once. The builder is required to offer proof (such as an invoice) that that the previous stage has been completed before the drawdown for the next stage can be released.
How is the total loan amount calculated?
Construction loans are based off the estimate of the home’s value when it will be completed as well as the materials and labour required to build it. This information is then used to find the approximate loan you’ll be given access to (incrementally of course). Your chances of receiving a higher loan may even improve if you’re planning on constructing a rental property as the lender may look into factors such as the future rental income.
Pay interest only on what you borrow
When you receive a home loan – you must pay interest on the entire sum that you’ve borrowed. This is not the case with a construction loan, however, which only requires you to pay interest on the money you’ve drawn down on as opposed to the entire loan that could be available.
Say you have $500,000 available to you in increments, but you only end up using $400,000 of that total sum – you’ll only have to pay interest on the $400,000 as you never accessed the final $100,000. This is an added advantage with a construction loan as you ultimately may end up paying less interest.
Construction loan eligibility
To be eligible for a construction loan some preparation that must be done. You must have comprehensive and detailed plans of the project ready for the lender and an appraiser to look over. This also includes the progress drawdown report. Our qualified quantity surveyors have experience with progress drawdown reports and can help you establish an effective and detailed one for you to use.
You will be required to pay a deposit when your loan has been approved – this is generally a minimum of 5% but the larger the deposit the more confidence the lender will most likely have in you so we recommend a higher percentage.
Looking for help with a construction loan?
Construction loans are highly desirable for financing your construction project. The controlled release of funding and interest feature makes it easier to manage both in the short term and long-term. The experts at Section 94 are equipped with the experience, knowledge and authority to handle all of the financial minutiae of construction loans – including creating progress drawdown reports – so your application can go as smoothly as possible.