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Creating bespoke custom homes.

Category: Finance

Confused about how Construction Loans work? Steve Menzies from Citywide makes it simple for us.

We often get asked about the process for financing your new build, and whilst we can explain the basics from our end it’s always best to get help from the experts. There is no one we would recommend speaking to more than Steve Menzies from Citywide, a Northern Beaches local like us, Steve explains everything so you understand what is happening but is also the unsurpassed in getting you the best deal around.

So, thanks to Steve for putting this together for us – and for any more info or help get in touch with Steve at steve.m@citywidelpi.com.au

Construction Loans Simplified

A construction loan is basically the same as a normal loan with a few slight differences. Firstly, the loan starts at a zero balance and is drawn down in stages as the build progresses. These stages are set out in the “fixed price building contract” from Icon Homes (or any licensed builder)

Example:  Total build cost is $800k

  • Stage 1. Concrete slab $160k (20%)
  • Stage 2. Framework $160k (20%)
  • Stage 3. Brickwork $200k (25%)
  • until the full build cost of $800k is drawn down.

These stages and amounts in the “fixed price building contract” need to be ticked off by the bank before the construction loan is approved. This is an added layer of protection for the customer as the bank will know what each stage of the build should cost and no money is given to the builder until the correct work is completed.

 

During the “construction phase” your payments are “Interest Only” on the amount of funds drawn down.

Using the example above :

  • Stage 1. $160k is drawn down for excavation & concrete slab. You begin to pay “Interest Only” on the $160k
  • Stage 2. $160k is drawn down for Framework. You now pay “Interest Only” on the $160k +$160k so a total of $320k
  • Stage 3. ……..etc.
  • Until the Final Stage where you will be paying “Interest Only” on the total funds drawn down of $800k.

When the build is complete or your “Interest Only” period finishes (say one year) your payments revert to Principle & Interest just like a normal home loan – that simple!

 

Other key features:

  • Inspection on first and last payment-To give you a peace of mind to ensure that the works completed are in line with the payment schedule prior to paying the builder. 
  • Loan to Value Ratio – Normal LVR’s of 80% are available with our panel of funders.
  • Interest Only During Construction– Allowing you to make a minimum repayment to increase cashflow during construction
  • No Extra Interest Rate Loading on Construction– We have banks that will not charge you extra on the interest rate for a construction loan. So you get the same cheap rate as a normal home loan!
  • Order Free* Upfront Valuations– Access to a panel of lenders that will allow you to order a free upfront valuation prior to submitting an application.
  • Quick Approvals– Access to a panel of lenders that can approve your application within the same time frames as residential applications
  • Building an Investment Property – If the finished property is an investment property you can use the projected rental income for servicing the loan.
  • Build up to 3 on 1 title– Majority of lenders will consider this as commercial development, which means higher fees, rates and shorter loan terms. We can consider this under residential rates, fees and loan terms.
  • Offset Account – When the build is complete you can add an offset account to reduce your interest repayments even more.