Renovating or building your dream home?

When building your dream home, understanding how construction loans work is crucial. These loans differ from standard home loans and are designed to fund the construction of a property in stages.

Here’s what you need to know:

Stages of Construction

Construction loans are typically divided into five stages, aligning with the different phases of building:

Foundation:

Covers the initial costs such as laying the foundation and site preparation.

Frame:

Funds the construction of the skeleton of the house, including walls and roofing.

Lock-up:

Focuses on securing the property by installing doors, windows, and external walls.

Fixing:

Includes internal fixtures such as plumbing, electrical, and plastering.

Completion:

Covers the final touches, including painting, flooring, and overall completion of the build.

Payments are made at the end of each stage, which means you only pay interest on the amount that has been drawn down, not the entire loan amount.

How much deposit is required?

For construction loans, lenders generally require at least a 5% deposit of the total construction cost. Some lenders might ask for a higher deposit. If you already own the land, you can use the equity you've built up as a deposit for the construction loan.

How repayments work?

During the construction phase, your loan repayments are typically interest-only, based on the amount that has been drawn down. This helps manage cash flow while your home is being built. For example, if you’ve been approved for a $250,000 loan and your first invoice is $50,000, you’ll only be charged interest on that $50,000 at first.

The loan generally transitions to a standard principal and interest repayment structure when the construction is complete.

Saving on Stamp Duty

One key benefit of building your home is the potential to save on stamp duty. Often, you only pay stamp duty on the land component, not the entire property value, resulting in significant savings. If you are a first home owner, you may also be eligible for a $10,000 First Home Owner Grant (FHOG) when building your home to live in.

For instance, if you buy a $900,000 property (your first home) to live in, you’ll need to pay $49,070 in stamp duty. However, if you purchase $300,000 worth of vacant land and build your first home on it for $600,000, you’ll pay $0 in stamp duty. Plus, you could be eligible for the $10,000 First Home Owner Grant.

You can find out more about the FHOG on the State Revenue Office Victoria website: www.sro.vic.gov.au/first-home-owner/applying-first-home-owner-grant.

How do you get a construction loan?

Once you’ve chosen a registered builder, you’ll need to provide a set of documents:

• A copy of the signed Industry Standard Fixed Price Contract.
• Copies of plans, specifications, and permits.
• Insurance policies, including Builder’s All Risk/Public Liability Insurance, Domestic/Home Warranty Insurance, and Public Liability Insurance.

We’ll then instruct the lender to complete an ‘as if complete’ valuation – an estimate of the market value of the land and proposed building/renovation. After receiving a satisfactory valuation, we can submit the construction loan application with the necessary supporting documents.

Ready to start building your dream home? Contact us today to discuss how we can support you and guide you through the construction loan process.