What’s involved with a construction loan?

You can have a construction loan for any of the 3 situations;

1. You purchase a land and house package,

2. You purchase the land first and then plan, design and build the home at a later stage or

3. You have an existing home that you demolish and then build a new home on your existing land.

This information is for borrowers who have engaged a qualified, registered builder to undertake the construction.

 

Land and house package

With a land and house package you buy the land and the construction component (you’ll sign a fixed price building contract) at the same time. Both the Contract of Sale for the land and the fixed price building contract (plus the plans and specifications) are submitted to the lender together. The lender will instruct the valuer to value the land. Then the valuer will go through the fixed price contract and value your home as if it were built. The valuer will determine the value of both components and the total value should be what you’ve paid. If all is acceptable to the lender, the lender will issue a formal approval for finance for both the land and construction and your loan offer documents will be sent to you. When you’ve carefully read, signed, dated and returned the documents (we recommend that you get your legal representative to review the documents), settlement will be arranged.

The land will be settled first and the builder will submit your construction contract plus the plans and specifications to your local council for approval. When approved by council, the stamped council plans together with the builder’s public liability insurance and Home Owners Warranty insurance is submitted to the lender. An Aurora Finance Group professional will liaise with the builder to get this information which we will then forward on to the lender.

 

You’ve got your land and now want to build the home

You’ve bought the land and now have the fixed price building contract signed. You’ll need to submit the fixed price contract (plus the plans and specifications) to the lender who’ll have the contract valued by a valuer as if the house was fully constructed. The valuer will value the home and this should be the same price at you paid. In some instances, for example if you’ve purchased the land some time ago, the lender will also have the land valued. A formal approval will be issued and your loan offer documents will be sent to you to sign.

The builder will submit the contract, plans and specifications to the local council for approval. When approved by council, the stamped council plans together with the builder’s public liability insurance and Home Owners Warranty insurance is submitted to the lender.

 

You have an existing home you want to pull down and erect a new home

You’ll firstly have to check your current loan contract to ascertain what the lender will allow because when you pull down the home, the value of the property is generally lower. You’ll have the extra cost of the demolition and the removal of the debris. When you have the fixed price contract the same procedure applies as in 2 above.

 

Progress payments

When the lender has received all the information regarding the construction (stamped plans and builder insurances) your builder will commence construction. You’ll have to pay the deposit and then the lender will fund the remainder of the construction. So, if your contract states that a 10% deposit is required, you’ll pay the 10% first and the lender will fund the remainder of the contract. Generally, there are 5 stages to the construction, 5 loan draw downs.

 

Interest only payments

During the construction phase, the repayments will be Interest Only (IO). On building completion the loan will convert to what you’ve received approval for; if it was IO, then repayments will remain IO, if Principal and Interest (P&I) then your loan will switch to P&I repayments when the last redraw is made. If you initially requested that the loan convert to a P&I loan at the completion of the construction, then generally you will not pay for the loan switch.

 

Aurora Finance Group finance professionals are experienced with construction loans

Aurora Finance Group finance professionals have helped many customers with their construction loans. We are skilled and experienced in this field and will be able to assist you with products and strategies that are most appropriate for your circumstances. We look forward to helping you with your important building project.