LAND & CONSTRUCTION LOAN
As the name implies, a land loan or vacant land loan is a type of home loan that borrowers obtain from a bank or other lender to purchase an empty block of land. The intention is usually so that the borrower can build a new home on the vacant land in the future.
A loan for land purchase is not the same as a regular home loan, and it comes with different costs and conditions. Land loans typically have higher deposit requirements and higher interest rates, as lenders see them as a riskier proposition than a traditional home loan.
Vacant land loans are often used instead of construction loans when the borrower knows that they won’t be able to commence or complete construction on the plot for at least 12 months.
A construction home loan is a type of home loan designed for people who are building a home as opposed to buying an established property. It has a different loan structure to home loans designed for people buying an existing home. A construction loan most commonly has a progressive drawn-down i.e. you withdraw funds in stages, as you receive bills from builder. You’ll only pay interest on the funds you’ve used.
To commence with a construction loan, you will need to provide a contract for the purchase of the vacant land, a fixed price contract for the construction and also council approved plans to determine the full cost to complete your home. The lender will then look to approve your home loan based on the ‘on completion’ value of your home. During the time you are building, the lender will inspect the site prior to making payments to the builder on your behalf. You will only pay interest on the loan amount drawn upon and paid to the builder at each step of construction. On the completion of construction, you will then revert to your standard monthly payments.
How do progress payments work?
Once a construction loan has been approved and the construction of the property is underway, lenders will make progress payments throughout the stages of construction.
Generally, the payments will be made at completion of following five stages:
(1) Slab down or base: This is an amount to help you lay the foundation of your property. It covers the levelling off the ground, as well as the plumbing and waterproofing of your foundation.
(2) Frame stage: This is an amount to help you build the frame of your property. It covers partial brickwork, the roofing, trusses, and windows.
(3) Lockup: This is an amount to help you put up the external walls and put in windows and doors (hence the term ‘lockup’, to make sure your house is lockable).
(4) Fitout or fixing: This is an amount to help you do the internal fittings and fixtures of your property. It covers plasterboards, the part-installation of cupboards and benches, plumbing, electricity, and gutters.
(5) Completion: This is an amount for the conclusion of contracted items as well as any finishing touches such as plumbing, electricity and overall cleaning.
It is also important to note that most banks require you to use all of your equity before they release the next payment.
Required documents for loan approval
To gain full approval from the lender for your construction loan, we will require the following documentation:
- Copy of the fixed price building contract from the builder you plan to use;
- Plans and specifications of the home you wish to construct;
- A building schedule and detailed costing;
- Copy of the Soil/Engineers report;
- Copy of council approval, if available at the time of application;
- Copy of the Builder’s Indemnity Cover; and
- Copy of fixed price quotes for any work not being done by the builder, e.g. carpets, air conditioning.
Other information to note is as follows:
- You must use your cash contribution (deposit) towards the project before the lender will advance any loan funds. This will usually happen on settlement of the land component.
- Any variations increasing the fixed price building contract generally must be covered by your own funds. It is difficult to increase the loan approval limit mid-project and will generally incur further fees from the lender.
- Any variations decreasing the fixed price building contract will generally require reassessment of the loan application as this may affect the overall valuation of the project.
- The lender does not accept any responsibility for the quality of construction of the dwelling or supervision of the building contractors. It may be worthwhile to have an independent building inspector inspect the construction at various stages.
- When calculating progress payments at each stage of completion, the lender does not include materials on site which have not been used or installed in the building.
- All progress payments will be made directly to the builder and will only be made providing the payment request is in accordance with the payment schedule in the contract. All borrowers to the
- loan will need to sign and approve the payment. The lender will also conduct a progress inspection to ensure the work being claimed for has in fact been completed and the construction will be completed with the remaining funds to be drawn.
- Once construction is completed and you have taken possession you will become responsible for the building insurance. You are required to take out a policy for the replacement value of the building with a reputable insurer, noting the lender as an interested party (mortgagee). The lender will require a
- copy of the insurance Certificate of Currency for their records.
Can we help you?
If you are looking for a land and/or construction loan or have any further queries, please contact us to make an appointment for a free no obligation consultation. Contact us