Building a new home can be a fun, exciting time. You get to choose all the great features you always wanted and you get to create a home that is uniquely yours.
How do construction home loans work?
Banks have a slightly different mortgage quote process for setting up construction loans as compared to a regular home loan for an established house.
When you buy an established house, the bank extends the amount of money you borrowed in order to complete the purchase and you simply move into your new home.
With construction loans, your bank will generate a set of progressively drawn payments that add up to the total amount you borrowed. As your builder builds your home, your bank is sent an invoice for each stage of construction as it’s completed. Your loan is drawn several times until the builder has been paid, your house is complete and then you get to move in once all these stages are finalised.
Interest payable throughout the construction process is minimized as it is only calculated and payable monthly on the amount of money that has already been paid to the builder or ‘drawn down’. Your repayments will increase as payment for each stage of construction is made. Furthermore the loan is normally structured as ‘interest only’ up until completion, thus minimizing repayments to maximize your cash flow during construction. Usually upon building completion and the full amount being drawn down the loan reverts to a ‘principal and interest’ loan to start paying off the principal.
It sounds complicated, but you don’t have to work through it alone. We can take this journey with you and walk you through the process so there’s no confusion.
Do I need to buy a house & land package to get a construction loan?
It’s not always necessary to purchase a house and land package from one location – although arranging a loan for a package does make your home loan options a little easier for you.
After all, you might find land you like much better somewhere else, or you might prefer a different builder to the one making you the offer. The choice is completely yours.
You do have the option of purchasing your vacant block of land first and then going out to source your builder once your land has settled. This could mean arranging two separate loans: one for your land purchase and another to pay for your construction.
Do I have to use a licensed builder to construct my home?
Some banks do have an option that may allow you to build your own home your way in your own time, but this option is definitely not suitable for the faint-hearted!
Generally, most banks want to see that the home you build is going to be a good security property for a long time to come. This is one reason why they prefer that you choose a licensed builder to construct your dream home.
If you’d like to discuss more options for building your new home and finding construction loans that suit your plans, contact us today.