What is a Construction Loan?

You need a Construction Loan when you want to build a new home, whether it is on a block of land that you already own or part of a House & Land package.

A Construction loan is generally drawn down in stages as the builder reaches the different milestones stipulated in the Building Contract.

These stages are generally:

1. The base stage (i.e. when the concrete slab is laid)
2. The frame stage (i.e. when the framework or walls are up)
3. Lockup stage (i.e. when the roof, door and windows are in place)
4. Fit out stage (i.e. when the house has been fitted out with appliances)
5. Completion (i.e. the house has been completed and is ready for occupation)

The lender uses an independent valuer to monitor the construction process and only makes progress payments when the builder has reached the defined stages and met satisfactory standards.

Most lenders only require interest payments on the loan during the construction phase. After completion the loan reverts to a standard Principal & Interest repayment loan and you have the option of choosing between different loan types, including Fixed Rate loans.

A construction loan helps to minimise your mortgage repayments until your new home is completed

In addition to your income and savings records, the documents you will need to apply for a construction loan are:

1. A "fixed price" Building Contract with a registered builder.
2. The Council approved plans for the proposed house
3. The house specifications documents.
4. Proof of the Builder’s current building insurance
5. In the case of a House & Land package, the purchase contract for the block of land.

Finance is available up to 100% of the property value.

What is an "Owner Builder" construction loan?

An 'Owner Builder' loan is one which is used to fund the construction of a home which is built by the owner. In this instance, there in no "Fixed Price" building contract with a Registered Builder and often, Owner Builders sub-contract all or part of the work to individual trades people.

From a lender’s point of view (and experience), Owner Builder loans are more risky for the following reasons:

1. The difficulty in establishing the owner’s experience as a builder
2. The frequent costs overrun due to the absence of a fixed price building contract and the resulting risk that the owner may not be able to complete the house within budget
3. The risk that the construction period may extend well over the standard 5-7 months.
4. And sometimes, the lack of a builder’s guarantee in relation to the quality of the work.

For all these reasons, lenders, if they get involved with Owner Builder loans, generally restrict their exposure to Owner Builder loans to 70-80% of the property value. In all other respects, the loan is similar to a standard construction loan.

Citiwide has many years experience with Owner Builders and has access to competitive lenders who take a positive approach to this kind of loan.

Apply for a loan now