Construction Loans 101: All About Financing When You Build a House
Many people strive for the opportunity to one day build their own dream home. Are you one of them?
You get to decide the look, the size, the layout and make it truly your own down to the last nail. But, like most people, you have questions about getting started.
Building a home can seem like a daunting task, both emotionally and financially. Luckily, it doesn’t take draining your savings to do it.
Today, we’re going to talk about construction or new home building loans and how you can use one to make building your dream home a reality.
Let’s get started!
Construction Loans: What Are They?
If you’ve been looking into ways to finance your home build or even renovate, you may have come across construction loans.
A construction loan is a type of loan program that allows you to pay for everything that comes along with building a home. This may include:
- The cost of land
- Contractors like plumbers, electricians, plasterers, tilers, roof carpenters, concreters, bricklayers, etc.
- Supplies and equipment
- Permits, insurance and designs
Of course, these factors may be different depending on your lender. It is important to discuss all of the details of your loan before signing those papers.
Once you get the loan, you aren’t given the cash all at once. Construction loans divide the building contract into pre-defined progress claims which take place at key stages of construction, for example, when the slab goes down, when the roof goes on or at lock up.
When the builder completes a build milestone they claim instalments from the lender. This ensures that the builder is only being paid for work they have completed.
The great news for you is that during construction you will only pay interest on the portion of the loan that is drawn each month. Many lenders only charge interest only repayments during construction. Once the house is complete, repayments revert to principal and interest if this is what you have selected.
How to Get Started
Now that you know a bit about construction loans, here are the steps to get started.
Find a Block of Land
If you are a developer or have already purchased your dream block to build on, you can skip this step.
If you are a first home buyer or even building your second home or third home but haven’t found your block, it can be quite daunting to determine what type of home can be built on the block, what building restrictions may apply or even what site costs you may have to pay. For those looking to demolish and build, a block may look like a great flat piece of land but it happens to need significant site works that are costly.
Often it helps to have a builder find you the perfect block of land, who can provide invaluable advice on a block that suits the type of home you want to build and creates a house and land package that fits your lifestyle and budget.
If you prefer to go it alone when looking for a block, there’s a few things to keep in mind. Be sure to look at the zoning and what zoning restrictions apply, the land size, dimensions and any slope. The last thing you want to do is purchase land that won’t allow you to do what you are looking to accomplish.
Choose the Right Builder
Regardless of whether you have land or not, it’s a good time to find the perfect builder.
Your builder will be responsible for applying for all of the permits and insurances for the build, managing the compliance to building laws, meet estate requirements, work with your lender or broker after you finalise the loan, and pay all employees and contractors working on your home.
You want to find a builder who is going to be easy to communicate with, knowledgeable, flexible, and understand your vision.
It’s best to choose a builder with a good amount of experience like Ventura Home Group. Preferably, someone who has worked on projects similar to yours. If you are planning on building a specific home, you want to find someone who’s done it before.
Find a Broker
It can sometimes be a challenge to get a construction loan. Part of the reason being that banks and lenders are willing to loan you cash for a home is that they have that home to use as collateral.
When you have no home yet to ensure that they will get their money back one way or another, lenders may be hesitant.
If you are applying directly with a bank there can be a lot of paperwork to manage and it’s important that you have all your plans, permits, and your team squared away before applying.
Most people who need a construction loan use a finance broker. Brokers have access to many different lenders with different products, criteria and rates to suit the clients’ individual needs.
Brokers take the stress out managing the finance side of building, not only getting the right loan for the client but also running around on behalf of the customer – and in the case of construction there are a lot of stakeholders!
At Ventura Home Group, we offer a full mortgage broking service with V Homeloans. V Homeloans specialise in construction loans and will take the stress out of applying for a new home loan.
Bonus Tip: Keep an Emergency Fund
You may have your financing all set up with your broker or a great lender and have a solid team working to make your dreams a reality. However, it’s always wise to be prepared.
Make sure that you have some extra money set aside in the case of an unforeseen expense. This will save you in the long run.
If everything goes exactly as planned, that money you saved can go straight towards making payments on the loan.
Build Your Dream Today
There’s nothing quite like coming home to a beautiful space you helped create yourself. It’s an opportunity many dream of, and it’s time you make it a reality.
If you’re ready to learn more about how you can get construction loans for your future home, check out our home loan page here!
Financial services are provided by VHG Finance Pty Ltd T/A V Homeloans; Corporate Credit Representative Number 495067 is authorised under Australian Credit Licence No. 389378.
Last updated Jun 18, 2019