Borrowing to build a home – what you need to know

Building your dream home from scratch can be an exciting prospect but borrowing to build is different to borrowing to buy - it’s worth taking some time to do your homework to find out which home loans are suitable for construction and what the best options are for your own circumstances. 

If you’re planning on building, you could be in the market for something called a construction loan, but what is it and how does it differ from a typical home loan?

Let’s unpack it...

Construction loans 101

You can use a construction loan to build something from scratch or to fund major structural renovations to an existing home. But unlike a loan to buy an existing property, a construction loan is structured with progress payments released to the builder at each phase of construction instead of as one lump sum. 

While your home is being built, you’ll make interest only payments on the money you’ve drawn down from your total loan amount. So for example, if you’ve drawn down $200,000 in progress payments from a $600,000 construction loan, you’ll only pay interest on that $200,000. Once construction is finished, your repayments will change to principal and interest repayments.

Payment stages

Loan progress payments are usually released as each construction phase is completed:

• Deposit - released to the builder to commence your build.
• Slab - released when the slab has been poured for the foundation.
• Frame - released once the exterior frame and walls are in place.
• Lock up  - released when external doors and windows are installed.
• Fit-out - released when internal fittings and fixtures are installed.
• Completion - released once construction is finalised.

Construction loan pros and cons

It’s a good idea to be across the pros and cons of construction loans before you decide if it’s the right kind of loan for your needs.

Pros

• Less interest: Potential interest savings are a big plus – you will make interest only payments on the amount you’ve drawn down in progress payments, not on the total loan amount. 
• Protection against financial loss: Another perk of a construction loan is that it can help shield you from financial loss due to poor workmanship or builder error, with progress payments only released when each stage of construction has been completed to the required standard. 
• Ability to make extra payments: You can usually make additional payments into your construction loan along the way which means you could pay off your loan sooner + save on interest over the life of your loan.

Cons

• Higher deposit: Lenders usually need you to have a higher deposit since borrowing to build is considered more of a risk than borrowing to buy an existing property.
• Payments in stages: Your lender will need to assess the work that’s been completed at each stage before they release payment to your builder which can add some time to the process. 
• More paperwork: It’s a bit more complicated than a regular home loan so your loan application, other paperwork and communication to and fro between your bank and builder along the way can be a bit more involved too.

Borrowing to build with us

We’d love to help you get your dream home off the ground and we’ve got just the loans to help you do it. Subject to loan approval, our Your Way home loans can be used as construction loans and offer great interest rates, flexibility + other great perks.

• Fixed and variable rate loan options
• Free redraw (for variable loans)
• Unlimited additional repayments on variable loans
• Ability to split your loan
• Great package benefits + discounts exclusively for essential workers with Your Way Plus.

Visit our website for more info here

Need some loan help?

Talk to a Lending Specialist for expert guidance on finding the best home loan for your needs. Whether you’re ready to build sooner rather than later, or you’re just weighing up your options for now, you can make a booking to talk to one of our Lending Specialists either at home (Covid-depending), over the phone, or via video call. 

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