A construction loan is usually for residential houses built for personal living or investment purposes. Instead of lump-sum payments as in the case of established properties, the construction of the house is funded through a series of progressive payments made to the builder after various stages are completed.
At every stage, the builder provides the owner with an invoice, which is signed by the owner and sent to bank/lender. The lender then makes the payment on that invoice to the builder.
Costs
As in other home loans, there are a variety of charges lender/bank charges during the construction loan. It is very important to factor in these charges while applying for a loan.
- Establishment fee: This is the fee charged by the lender to set up a home loan and varies from lender to lender.
- Settlement fee: This is usually paid at the time when the property settles.
- Progressive Drawing Fee: In the case of construction loans during the construction phase, banks usually charge a fee every time a loan amount is drawn at different stages of construction. This is usually paid on the final drawing but may vary from lender to lender.
- Annual Packages and Fees: Some lenders charge an annual fee for availing of other services such as credit cards which becomes part of the annual package fees.
There are other varieties of fees that we will let you know at the time of selecting a product and the lender.
Stages of Construction and the approximate cost for each stage:
There are typically 5 stages of construction of a residential home:
- Slab: After all the permits are approved and the builder has been selected the first stage of construction is when the foundation slab is poured.
This stage requires approximately 15 to 20% of the cost and generally includes the deposit an owner has already paid to the builder.
- Frame: This stage involves building external frames and walls of the property. It also includes support structures, conduits for electrical and plumbing, and insulation and gutters.
Approximately another 20% is required for this stage of construction.
- Lock-Up: At this stage, the property can be locked as doors, windows, roof, and all other supplies are installed.
This stage normally requires another 20%.
- Fit-out: At this stage, all internal fixtures and fittings are installed which includes lights, power points, taps, and other plumbing fixtures.
- Final Stage of Completion: This stage involves the final cleaning, painting, or fencing of the house by the builder and involves any other completed work.
The final stage normally requires the final payment of 10%.
The flexibility of Construction Loan:
Construction Loans have Interest Only payments during the construction period, which provides the flexibility of lower repayments thus facilitating people with a lower deposit.
Keys things to remember about construction loans:
- Builder price Variance: It is very important to keep a buffer since the price of construction has been rising. Most builders have clauses in the contract which help them pass the increasing cost of supplies to the owner. It is very important to get the contract checked by a solicitor before signing it.
- Timing: Usually the lenders require the construction to start within 6 months of the disclosure date on the loan contract and require the construction to be completed within 24 months of that disclosure date.
Our expert team of mortgage brokers at Oracle Ezy Finance will help you select the best lender and the product with the lowest interest rates which satisfy your needs and objectives. We make it easier for you at every stage of construction with our exceptional customer service and by communicating effectively with the bank/lender.
