There’s no one-size-fits-all when it comes to breaking into the property market. That’s why it’s a good idea to carefully evaluate a wide range of options and pathways.
By understanding what a construction loan is and how it works, you can begin to explore another route to home ownership. This can provide you with the knowledge and understanding you need to make the best choices for your finances and your family.
What is a construction loan? How does it work?
What is a construction loan?
A construction loan is just that: a loan designed to support the construction of a new property.
Unlike traditional mortgages, which start at the full amount to cover a property purchase, a construction loan is taken out progressively. Your loan amount will increase as you use your funds to construct your home.
How a construction loan works
A construction loan does not start with a. lump sum payment. Instead, your lender will provide you with necessary funds in instalments over the course of the construction process.
As your builder progresses, you will receive invoices to sign and forward to your broker or lender so that additional funds can be released. Over this time, you’ll pay interest only on the amount you have borrowed so far, instead of paying interest on the total loan as it will stand at project completion.
When your property is complete and ready to move into, your loan deal with switch, and you’ll start paying principal and interest repayments on a loan term.
Where to go for a loan
Many lenders in Australia are able to offer construction loans, but these loans are not available across the board.
Usually, your best option is to approach the big banks, who often have established construction loan packages. Remember to shop around to ensure you’re getting the best value for your money, now and in the long-term.
If you’re struggling to find a lender who will provide you with the construction loan you need, it’s a good idea to contact an experienced mortgage broker, who can negotiate on your behalf.
Applying for a construction loan
The process of applying for a construction loan is similar to applying for a loan to purchase an established property.
Generally, you’ll be required to provide financial information, and your lender will evaluate your income, outgoings, debts, credit history, and other details. They will also consult a property valuer for an estimate of the property’s market value on build completion.
What differs when pursuing a construction loan is that you may also need additional permits from council and other authorities, as well as building plans and contracts. These should be submitted to your lender alongside your application so that the underwriter has all the information they need to make an informed decision.
Could you use some support securing a construction loan? You’ve come to the right place. We’re happy to help! Contact the team at Our Top 10 for the best mortgage brokers Melbourne has to offer.