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
Construction loans – how they work
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.
Why do lenders require a fixed price contract?
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.
How is interest calculated during the construction phase?
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.
How do progress payments work?
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.
What documentation will I require?
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
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.