Construction loan or home loan – New Build?
A construction loan can be a common way to finance the build of your new home, or a good option for major renovations. However, if you already own a home and have plenty of equity, you may find that a regular home loan suits you better.
To find out what loan type would suit your needs, contact us today to talk through your position.
What are the Benefits of a construction loan
Depending on your individual circumstances, and we help you build a new home. Using our home loan calculators, can you an idea of the rates and fees. For the building process, we can often arrange 12 months conditional approval, so you have plenty of time to find the right section and plan your build. We often arrange interest-only during the construction period, to help reduce your outgoings during the buildup to help you gather more savings. This is especially handy if you’re trying to build and pay rent or an existing mortgage at the same time
Types of construction loans
This is a single fixed-price contract with the builder that specifies a completed property or renovation. The property is ready to live in and includes all major landscaping, drives and pathways decorating. We’ve touched on this plenty of times. You can learn more about turnkey here.
With a build only contract, you only have a single fixed-price contract with a builder. This contract specifies the completed property or renovation to a completely livable and compliant condition.
The owner is responsible for completing some finishing work themselves or may have other contracts in place. They can be a bit riskier than a turnkey project. The minimum deposit required for build only contract is usually 20% which is similar to purchasing an existing plan.
We can arrange these sorts of builds for both first home buyers and for investment property. There are advantages if you can leverage your existing house as the equity can be used as part of the deposit.
Another way to structure it is with a partial contract. This involves a range of sub-contracts managed by the customer or a project manager, and/or a labour only arrangement with contractor. This type typically includes relocated and kitset homes. We can also help with these. In the case of kitset and relocated homes, the lending is generally limited to the land value only, until the buildings are permanently attached. Therefore you may have to have more money upfront to assist with the lending process. Generally the minimum deposit required for partial contract is usually 35%.
How does it work?
First you’ll need to get a valuation done to estimate how much the home will be worth when it’s completed.We’ll review the valuation and let you know how much you can borrow, and once you’ve set up a contract with your builder, will make each payment directly (with your deposit being used first).As the building begins, the construction loan is paid in agreed stages. Your contract with the builder may set out how much is paid at each stage, and the building will need to be inspected and certified at each stage by a valuer to say the work has been done. This can lead to additional costs. If you’re borrowing quite a lot of money you may even need to get interim valuations done by a registered valuer. During the project you only pay interest on the money already drawn down, and you don’t start repaying the loan itself until the project is finished. A construction loan is usually on a floating interest rate. We may also be able to help you even if you are self employed.