Construction Loan Process For A New Build
Construction Loan Process – Typical house and land package general overview:
Stage 1 – Pre approval
Mortgage Broker Melbourne arranges a pre approval for the estimated total cost of the land + construction. This approval is not specific to any particular property it is just confirms your buying power.
Stage 2 – Land is chosen
Once a block of land is chosen and a price agreed, you will sign a contract to purchase the land subject to finance.
Stage 3 – Pre approval converts to full approval
At this time we would re approach the lender to have our pre approval broken down into 2 separate loans, one for the land and the other for the actual construction. Full approval is arranged for the land loan leaving the construction loan as a pre approval for now.
Stage 4 – Land Settlement
Settlement takes place on the land before the construction loan commences so your initial mortgage repayments are principal and interest just for the land loan portion. Congratulations you own a block of land!
Stage 5 – Choosing a home
The builder will work with you on the design and once this is agreed they will supply you with plans and specifications for the house. The price of the construction project is agreed and you will sign a fixed price builder’s contract for the work to be carried out. This is also signed subject to finance.
Stage 6 – Converting the construction pre approval to full approval
We reapproach the lender with the following documents:
- Fixed price builder contract fully signed
- Plans and specifications for the building
- Builders warranty insurance
- Council approved plans
A lender will use these items to estimate the value of the home as if it were complete. The result of this valuation determines the amount of finance you can obtain, but usually the value is the combined cost of the land + the building cost. A lender would then typically lend you up to 95% of the valuation figure depending on your eligibility. Once the valuation is accepted and your incomes and deposit have been re confirmed to the lender, full approval is granted for the construction loan portion.
Stage 7 – Construction commences
Once the loan is unconditionally approved you pay the initial 5% deposit to get the builder started and construction is completed in 6 stages:
- Initial 5% deposit
- Base stage (Concrete slab or stumps)
- Lock up
After stage 1 which is just you paying the deposit, the builder will invoice you for payment as each stage is completed. This invoice gets passed on to the lender to pay the builder directly*. It is normal that a lender will send the valuer out at lock up stage to make sure work is on track, then again before the final payment is made.
Once funds are drawn and paid to the builder the construction loan repayments commence in addition to the land loan payments you are already making. Repayments for the construction are interest only and gradually increase as each stage is completed. Once work is finished the repayments on the construction loan change to principal and interest rather than the previous, interest only arrangement.
Here is a summary of when funds are paid:
- Deposit is paid on the land from your savings (usually 5 – 10% of the price)
- On settlement of the land you pay the remainder of the purchase price + the stamp duties and legal costs (funded probably by the loan)
- Once the construction is fully approved by the lender and the council you pay the deposit to get the builder started (usually 5% of the contract price)
- The bank then pays the remaining progress payments unless you have funds for one and the arrangement is the lender pays the rest, it depends on your circumstances.
- The First Home Owners Grant is paid after the first progress payment is paid to the builder by the bank.
- A lender will not make the final payment until a certificate of occupancy is issued by the council.
*Note – Since the funds are being lent to you based on the final value of the home the construction funds are not given to you to control the payments to the builder, the builder is paid by the lender in the form of a cheque or direct bank transfer.
Marc has been a professional lender for 28 years. After beginning his career in 1990 with a UK Building Society, he moved to Australia where he held several different retail banking roles. In 1999 it became clear to him that a mortgage broker would eventually become an obvious choice for someone looking for a home loan so he took the plunge and became an independent broker. He hasn’t looked back since!