construction loan:

a comprehensive guide for successful projects

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Construction Loan: A Comprehensive Guide for Successful Projects


A construction loan is a type of home loan designed specifically for anyone looking to build or significantly renovate a property.

Unlike traditional home loans which are drawn down in one stage at settlement, construction loans are structured to release funds in stages as your project progresses, ensuring that you only pay for work that has been completed.

During the building process, you typically only pay interest on the amount drawn down at each stage, so you are only paying interest on funds that you have used, this usually results in lower repayments while your project is underway.

As a borrower, it’s essential to understand the intricacies of construction loans and how they may differ from standard home loans.

A construction loan usually involves a designated timeline for the commencement and completion of the project, often within 12 to 24 months, and requires progress payments made to the builder or contractor based on milestones outlined in the fixed price building contract.

Regular inspections or progress valuations take place throughout the build by the lender to confirm that work is completed according to specifications.


Self employed-business owners

Borrower’s Guide to Vacant Land and Construction Funding

Vacant land

If you are seeking to finance the construction of your new home or investment property, you would either need to fund it with cash if you were fortunate enough or get an approval for construction loan.

Construction loans are typically tailored for individuals who have already acquired a parcel of unoccupied land; otherwise, it is probable that you would need to obtain a loan for both the land and construction. They are closely related, yet not entirely identical.

To complete the application process, you will be required to provide details about the land, such as its location, lot number, or street number.

Additionally, either your broker or lender will order a valuation in order to find out the value of the land, which will serve as security for the loan.

Contact us today to get your construction loan application underway. We will walk you through the required process and documentation needed for your situation.

Funds for Vacant Land settlement

Typically, you cannot use the FHOG proceeds for vacant land at settlement. In most cases, the FHOG is only released during the construction phase.

However, some lenders may allow an amount equivalent to the approved FHOG (First Home Owner Grant) to be advanced from the borrower’s approved construction loan for use at the borrower’s vacant land settlement.

The borrower must meet the criteria of being a First Home Buyer, qualifying for the grant, and purchasing vacant land with construction lending approval prior to land settlement.

This amount will be advanced from your approved construction loan and is solely designated for use at land settlement. At the first progress payment stage, the approved government grant will be credited back to your construction loan, ensuring sufficient funds are held to meet construction costs.

Fixed Price Building Contract

Prior to commencing construction on a new home or investment property, obtaining a fixed-price building contract from a licensed builder is crucial.

Typically, this contract details the overall project cost, encompassing construction stages, fees, and any modifications to the original plans.

Typically, the repayment structure of your construction loan will be tailored to the fixed-price building contract. The lender will gradually release funds as the construction moves forward.

Most lenders require interest-only payments during construction, although some may require principal and interest repayments.

If your lender permits interest-only payments, it can assist with cash flow, and you may have the option to make extra repayments.

Once construction is done and your new home is finished, your loan will typically convert to a principal and interest loan. Regular repayments will be calculated on the full loan amount after it is fully drawn.

Although variable rate construction loans are widespread, there is significant variation in comparison rates and lending criteria among lenders.

Speak to us for expert guidance on your situation and let us find the most suitable option for you. Depending on your circumstances, lenders mortgage insurance may be applicable if the deposit amount and property value indicate an LVR over 80%.

How Do Construction Loans Work?

As previously mentioned, a construction loan is a home loan for individuals who want to build their own house. Construction loans differ from traditional home loans as they involve multiple stages of fund drawdown throughout the construction process.

Payments You Must Make During Construction

During the construction process, you’ll typically make interest-only payments on the amount you’ve drawn down, therefore only incurring interest on the amount drawn down.

As you draw down more funds, your loan will increase, leading to higher interest repayments until the construction is complete.
Progress Payments

As your builder progresses through different stages of the construction process, your lender will disburse progress payments directly to them. These payments are often referred to as ‘progressive drawdowns’ or ‘progress payments.’ It’s crucial to have a clear understanding of these payment milestones in your building contract to ensure your construction progresses smoothly.

If you’re a first-time home buyer, keep in mind that construction loans have specific lending criteria. Reach out to us today for expert guidance in this process.

Building Contract Progress Payment Schedules

  • Stage 1 –  Slab/Base 10% of contract price

At this stage, the foundation of the building is laid, and the payment will be approximately 10% of the total contract price. This is critical for ensuring a stable and robust base for the construction of your new home.

  • Stage 2 –  Frame 15% of Contract Price

The next payment stage is the frame construction, accounting for about 15% of the contract price. This involves erecting the building’s frame or skeleton, which forms the basis for walls, floors, and roofs.

  • Stage 3 –  Lock Up 35% of Contract Price

At this stage, the foundation of the building is laid, and the payment will be approximately 10% of the total contract price. This is critical for ensuring a stable and robust base for the construction of your new home.

  • Stage 4 –  Fit Out 25% of Contract Price

During the fit-out stage, the interior of the building is completed. This includes tasks like the installation of cabinetry, plumbing fixtures, and electrical work. The progress payment for this stage is typically 25% of the contract price.

  • Stage 5 –  Practical Completion 15% of Contract Price

At the practical completion stage, the building is deemed ready for occupancy. Roughly 15% of the contract price is payable at this point. The remaining minor issues, if any, will be addressed in the final progress payment.

  • Stage 6 –   Final Progress Payment

The last progress payment includes any remaining work or adjustments from construction. Before making the payment, the lender will arrange a final inspection valuation to ensure everything aligns with the contract.


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