Building your dream home can be an exciting and proud achievement. There is however a serious side to the finance and builders contract you will be required to sign.
It is important to first get unconditional finance from a lender before entering into a contract with a builder.The summary below is a guide to general policies and what you will need to do before you can get the full approval from the lender.
When you take out a construction loan, the funds are not advanced upon settlement as they would with a purchase. Funds are released and paid to your contracted builder as “progress payments” on the completion of each defined stage of the Building Contract, e.g. completion of slab, framework, and so forth. Both the existing value and an “on-completion value” is used in calculating how much the lender is prepared to advance.
Because the lender advances money on the completed value of the property, they require that you enter into a fixed price contract with a licensed builder. This reduces the risks such as running over budget and the inability to raise funds to complete the project, over-capitalising and incurring costly errors.
Until the first progress payment is made, there is no interest charged on your loan. Charges commence from the first progress payment that is made to your builder. Payments are usually calculated on a variable, interest-only basis on the amount drawn down. On completion of the project, depending on which lender you use, you may be able to switch the loan to another product.
The Builder’s Contract will have a schedule of progress payments which will need to be made throughout the building process. Usually there are between 3 to 6 progress payments. An invoice is issued by the builder and the lender will send a representative to inspect that the work is completed to satisfaction before releasing a payment. Some lenders will pay the builder on your signed release that the work has been completed. In this case, it would be wise to consult with your architect that the work is done to standard. There is always a final valuation performed before the final payment is made.
In additional to your income and financial information, the lender will want to see the architectect’s plans and engineering reports, council approval, a fixed-price contract from a builder and building insurance. Depending on the location or previous use of the site, other information such as environmental assessments may also be required. Once satisfied that all conditions have been met, including a satisfactory end-value, the lender will then grant an unconditional approval. Please do not hesitate to call me to discuss your individual project.
Tip: Make sure you get the full approval from the lender before signing contracts with a builder. Allow additional time for the approval, as the valuation process is more involved. If you have any doubts about a contract you are thinking of signing, it is important that you seek legal advice before entering a contract.