Everything You Need to Know About Construction Loans

Understanding Construction Loans and Building Project Funding

Building a new home is an exciting journey, but securing the right construction finance can feel overwhelming. Unlike standard home loans, construction loans are specifically designed to fund the building of a new property, whether you're working with a registered builder or undertaking an owner builder finance project.

Construction loans provide funding that is released progressively throughout the building process, rather than as a single lump sum. This means you only charge interest on the amount drawn down at each stage, making them a cost-effective solution for bringing your new home to life.

How Construction Funding Works

Construction finance operates differently from traditional mortgages. Instead of receiving the entire loan amount upfront, funds are released according to a construction draw schedule or progressive payment schedule. This schedule is tied directly to specific building milestones, ensuring that money is available when you need it.

Here's how the process typically works:

1. Loan Approval: Your construction loan application is assessed based on your borrowing capacity, the land value, and the estimated building costs
2. Progressive Drawdown: Funds are released in instalments as construction progresses
3. Progress Inspection: Before each payment, a progress inspection confirms that work has been completed to the required standard
4. Interest Payments: During construction, you typically make interest-only repayment options on the amount already drawn down
5. Conversion: Once building is complete, the loan converts to a standard home loan with principal and interest repayments

Types of Construction Loan Options

When exploring construction loan options from banks and lenders across Australia, you'll encounter several financing structures:

Land and Construction Package: If you've found suitable land but haven't purchased it yet, a land and build loan combines the land purchase with building costs into one facility. These packages can be particularly attractive for house & land packages offered by developers.

Construction to Permanent Loan: This product seamlessly transitions from construction funding to a standard mortgage once your build is complete, eliminating the need to refinance.

Owner Builder Finance: For those with building experience who want to manage their own project, owner builder finance is available, though lenders typically have stricter requirements.

Renovation Finance: If you're undertaking significant renovations rather than building from scratch, a house renovation loan or home improvement loan can fund your project.

Spec Home Finance: For investors building a property to sell, spec home finance provides the necessary funding for speculative building projects.

Fixed Price Contracts vs Cost Plus Contracts

When securing building project funding, lenders prefer fixed price building contract arrangements. A fixed price contract specifies the total building cost upfront, providing certainty for both you and your lender. This contrasts with cost plus contract arrangements, where the final cost can vary based on actual expenses plus a builder's margin.

Most lenders require:

• A registered builder with appropriate insurance
• Fixed price contracts that clearly outline the scope of work
• Council approval and approved development application
• A commitment to commence building within a set period from the Disclosure Date

Understanding the Progress Payment Schedule

The progress payment schedule is central to construction funding. Your registered builder will submit claims at various stages of construction, typically including:

• Base stage (slab or foundations)
• Frame stage
• Lock-up stage (roof and windows complete)
• Fixing stage (internal fit-out)
• Practical completion

Each stage triggers a progress payment, with a progress inspection conducted to verify completion before funds are released to pay sub-contractors, including plumbers, electricians, and other trades. Most lenders charge a Progressive Drawing Fee for each inspection and payment, typically ranging from $150 to $400 per draw.

Construction Loan Interest Rates and Costs

Construction loan interest rates are generally comparable to standard variable rates, though they may be slightly higher due to the progressive nature of the facility. During the construction phase, most borrowers make interest-only payments on the amount drawn down, keeping costs manageable while the home is being built.

Additional costs to consider include:

• Progressive Payment Schedule fees
• Building insurance
• Council fees and charges
• Professional fees for architects or draftspeople
• Contingency funds (typically 10% of the build cost)

Custom Home Finance and Project Home Loans

Whether you're planning a custom design with unique architectural features or selecting a project home loan for a standard design, construction loans can accommodate both approaches. Custom home finance typically requires detailed council plans and may involve a longer approval process, while project home loans with established builders can move more quickly.

Eligibility for Building New Home Finance

To access construction loan options, you'll need to demonstrate:

• Sufficient income to service both the construction loan and your existing accommodation costs
• A deposit (typically 10-20% of the total land and construction costs)
• Approved building plans and council approval
• A fixed price building contract with a registered builder
• Evidence that you can commence building within the lender's required timeframe

For those interested in off the plan finance or house & land packages, your mortgage broker in Brighton can help identify suitable options that align with your needs.

Working with Solara Financial for Your Construction Loan

As your renovation Finance & Mortgage Broker, Solara Financial can access construction loan options from banks and lenders across Australia, ensuring you receive suitable terms for your building project. Whether you're looking to build your dream home, purchase a land and construction package, or undertake quality construction renovations, our team can guide you through the construction loan application process.

We work with clients across Brighton to secure the right loan amount and structure for their circumstances, whether that's a building loan for a new home, investment property construction finance, or a home improvement loan for substantial renovations.

Your construction funding journey doesn't need to be complicated. With the right support and knowledge of how progress payments, construction draw schedules, and interest calculations work, you can confidently move forward with building your new home.

Ready to discuss your building project funding needs? Call one of our team or book an appointment at a time that works for you. Let's work together to turn your plans into reality with the right construction finance solution.