Traditional home loans make the entire lump sum available to you to use as you require it, which is an excellent arrangement for most families. But if you're building, a progressively-drawn construction loan has additional benefits that may serve your needs better in the long run.
While you may have heard of a construction loan, you may have also pushed thoughts of it aside. This is because many people want to secure their home loans as quickly as possible, and may be deterred by the slightly longer application process for a construction loan. In addition, many people choose to purchase existing homes, and a construction loan seems irrelevant.
But if you've got your heart set on building your dream home from the ground up, a construction loan not only helps you fund it, but makes sure it meets required standards before payment is made to your builder.
Drip feed payments
The building process is divided into five key stages of construction, with a payment set aside to cover the costs at each stage. As construction on your new home progresses, your lender will send around a valuer to inspect the quality of the work. If the work passes the inspection, the valuer will inform the lender, who will release the funds for the next step in construction.
So, not only will you be protected in case construction is delayed, or work is not up to scratch, you'll only be paying interest on the funds that you've used to this point - not on the entire loan amount.
What happens after my property is complete?
After your new home is completed to your satisfaction and you're all ready to move in, the remaining construction loan amount usually reverts to a fixed or variable rate mortgage - just like a traditional home loan.
Just be prepared for the paper chase
That said, do bear in mind that the application process takes slightly more time than for a traditional home loan. Your builder will need to supply you with proof of their licence and their insurance policy, and you will need to bring your house plans and official approval from the local council.
But what if I need to pay a deposit? Or stamp duty?
Both of these are covered with a construction loan. In the event that you need to put down a deposit, a Deposit Guarantee can help you move quickly as a substitute for part, or all of your deposit. The bonus here is that you get to hold onto your funds until after the settlement is finalised.
Don't forget to budget correctly for stamp duty also: while a vacant block pays less stamp duty, a house and land package will pay slightly more. Check with the revenue office of your local government to see what concessions are available for new home builders or buyers, and factor this in when deciding on how much you need to borrow.
Continue to selecting a great block of land.