The average house price in Australia is now more than $500,000. That makes it difficult for anyone to get on the bottom of the ladder or to move property.
This is part of the motivation for many people to consider building their own homes. It is cheaper to take this route and you’ll be able to build the home of your dreams.
However, even with one of the best corporate finance firms, there are limitations and specific requirements to comply with if you want a construction loan:
Loan to value
The lender will want to see detailed plans of your plot and the house you intend to build. It is much more difficult to value a house that has not yet been built. In addition, the risk is higher as the firm will find it difficult to secure funds on an unfinished or even not yet started the project.
This is reflected in the fact that the credit controls are tight and you’ll loan to value is lower. Most finance companies will expect you to put at least 20% of the cost down. This should be enough to get the project started and reduce the risk for the finance company.
Time limit
A construction loan is for a short-term period. The lender may allow you a year to build and then 6 months to repay the capital. It is rare that the construction loan is converted to a mortgage although it is possible.
This means you need to have everything organized before you have the cash released. You also need to consider what type of finance you’ll use after the build to repay the construction loan. A conventional mortgage can be used at this point.
Fees
You’ll need to check the conditions of your loan. It is likely that there will be progress fees attached to the release of the funds. This is usually done in 3 blocks for the foundation stage, building stage and the interior stage.
Paperwork
Because this is a higher risk type of loan there is far more paperwork than your traditional mortgage application. This doesn’t mean you can’t get a construction loan it just means you need to have all the relevant paperwork and some time to fill everything incorrectly.
Variations in contract
If for any reason your build schedule or the design of the house needs to change while you’re building then you need to contact your construction finance company straight away. This may trigger a reassessment and an increase or even a decrease in the funds lent to you. There may also be additional fees which are why you should avoid amending the plans if at all possible.
The good news is that if you are able to finish under budget you don’t have to draw down the entire amount. Interest is only charged when you draw the money; the later you can leave this the less it will cost you; that’s going to help keep the price of your finished home within your budget.