LAND & CONSTRUCTION LOAN
Borrowers get land loan from a lender to buy an empty block of land, with the intention to build a new home on the vacant land in the future.
A loan for land purchase has different costs and loan conditions. It typically has higher deposit and interest rates requirements in comparison to other home loans, as lenders consider it as a riskier proposition than a traditional home loan.
Land loan is generally the preferred loan option than construction loan when the borrower intent to commence construction on the plot not within the next 12 months.
A construction loan assist you in building your brand new home rather than buying an established property. It has a different loan structure in comparison to home loans where you buy an existing home. It has progressive drawn-down i.e. you withdraw funds in different stages based on the invoices from the builder. You will pay interest only on the funds you’ve withdrawn, not on the approved limit.
To get the approval for a construction loan, you will need to provide a purchase contract of the land, a fixed price construction contract and also the local council approval. The valuation of the security property will be based on the ‘on completion’ value of your home. During the construction period, the lender will inspect the site before making progress payments to the builder on your behalf. Your lender will pay to the builder at each step of the construction from the approved limit while you will only need to pay interest on the draw down amount. On the completion of construction, you will then revert to your standard monthly repayments to pay back the loan.
How do progress payments work?
After the approval of the construction loan, the construction of the property will begin and lender will make progress payments throughout the different stages of construction.
Generally, the payments will be made at completion of following five stages:
(1) Slab down or base: This is the first stage of construction where you lay down the foundation of your property. It involves the levelling off the ground, plumbing and waterproofing of the foundation.
(2) Frame: At this stage, you build the frame of your property. It includes brickwork, the roofing and windows etc.
(3) Lockup: The next stage is to put up the external walls, windows and doors (to make sure your house is lockable and secured).
(4) Fitout or fixing: At this stage, builder will do the internal fittings and fixtures of your property such as cupboards, benches, plasterboards, plumbing, gutters and electricity.
(5) Completion: At the completion stage, remaining contracted items will be concluded with any finishing touches like plumbing, electricity and overall cleaning etc.
It is also important to note that most banks require you to use all of your equity (deposit) before they release the progress payments.
Required documents for loan approval
In order to gain the full approval from the lender for your construction loan, the following documents will be required:
- Copy of the fixed price building contract;
- Plans and specifications of the home you are looking for to construct;
- A building schedule and detailed costing;
- Copy of the Soil/Engineers report;
- Copy of council approval;
- Copy of the Builder’s Indemnity Cover; and
- Copy of other fixed price quotations for any work not being included in the building contract e.g. carpets, air conditioning.
Other information to note is as follows:
- You will be required to fully use your equity contribution (deposit) towards the project before the lender will disburse any progress payments. This will usually happen on settlement of the land purchase.
- Any variations or increase in the building cost afterwards generally to be paid by your own funds. Once approved and construction started, it is difficult to increase the loan amount during the construction and the lender may incur further fees.
- On the other hand, any variations or decrease in the building cost will generally require reassessment of the loan application as this may affect the overall valuation of the property.
- The lender does not take any responsibility for the quality of construction or supervision of the building contractors. It may be better to hire an independent building inspector to inspect the construction at various stages.
- All progress payments will be made directly to the builder, provided the payment request is in accordance with the payment schedule in the contract.
- All borrowers to the loan will need to sign the payment request. The lender will also conduct a periodical inspection to make sure that the work being claimed for has in fact been completed and the remaining funds under the limit are sufficient enough to complete the project.
- Once construction is completed and you have taken possession you will become responsible for the building insurance with an insurer, noting the lender as a mortgagee on the property. The lender will also require a copy of certificate of insurance for their record purpose.
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