Is It Harder To Qualify For A Construction Loan?

✅A construction loan is definitely more involved than a loan for an existing dwelling.  There are so many moving parts to the process: council, quantity surveyors, builders, bank lenders, non-bank lenders, contractors and solicitors.

✅Our job at Mortgage Broker Revesby is to keep the process moving where these stakeholders get off track.  

✅Initial construction loan amounts and constant amendments can delay a construction loan significantly.  This is why you need a mortgage broker on your side from the start. 

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So How Does A Construction Loan Work?

✅You will need to present your building contract to the lender.

✅The lender will have a valuer estimate the completed value of the property.  There are two possible valuations here.  The lender will take the lessor of the two:

        1. Land + cost of construction

        2. Completion value   

✅Some lenders may factor in the future rental income for investment property constructions.  This will greatly increase your borrowing capacity.

 ✅Loan documents are issued for signing.  

✅Your builder will need to provide final council-approved plans, draw-down schedule and his insurance to start receiving payment for work.  This should be done before commencing.

How does the builder get paid in each of the construction stages?

✅The builder will complete the first stage agreed of the project and issue you with an invoice.

✅Simply sign the draw down request form and send along with the builders invoice to the lender.

✅Your bank may require a new valuation at this stage to be satisfied with the work.

✅The funds will then transfer to the builder.

✅This process will occur for each stage in the construction process or as agreed with the lender.

How do I know if the current stage of construction is complete?

✅Ask the builder as many questions as you need.  Also walk through the property with him/her to be satisfied it's built to the agreed specifications (fittings used etc).

✅Do not rely on the banks valuer to do this for you.  Take this seriously and make sure the work you have paid for is completed to your satisfaction.  Once it's signed off, it's hard to make the builder go back and reconcile.

✅At the last draw down it may be prudent to get a building consultant to check the finished project against what you initially agreed.  Don't be in a hurry to sign off.

What about amendments to the contract?

✅Do your best not to make amendments once you've agreed to the project.  If you need to go back to the lender for additional funds, they may need to reassess the whole loan again.  This can cause weeks in delay.

✅If the amendment is small, try to cover the cost with your savings etc.  

✅The more amendments you make, the larger the delay in the project.  So be sure before you sign off on the final plans and then get out of your own way.

✅It's best to have all the minor quotes like landscaping, swimming pool or utility connections incorporated by the the builder under the initial loan.  You can select your own contractors (if you believe it's cheaper), but work with your project manager so he can pay these other entity's directly.  Your lender may not agree to extra funds for these fittings until after the completion of the original project.  Expect delays if you chose to fund these separately.  

✅Extras include: driveways, swimming pool, clearing of site, landscaping, patio and garden sheds.  Know what extras you need at the start of the loan application process.  You must have a written quote from the contractor to have extra funds extended by the lender for these works. 

What deposit will I need for a construction loan?

✅It is very normal for a construction project to blow out.  It's recommended that you get approved for just a little extra to ensure you're not left short.  If you don't end up needing it, just pay it off your loan immediately after the construction and avoid a larger interest bill.

✅Make sure you account for funds needed to create a building contract and council approval applications.  Your bank or lender won't release funds above the agreed construction draw downs at each stage.  This is why you need a mortgage broker to help you.

When is the First Home Owner Grant Paid?

✅The FHOG is paid to the 'lender' by the 'government' after the first draw-down is made by the builder.

Isn't my construction loan interest rate higher?

✅After the completion of your project, you can always refinance the loan to the best deal going at that time.  There will be a new valuation of the finished project that will almost certainly involve a walk through inspection.  You may even have equity in the finished project qualifying you for an even lower interest rate.

Need some help? No fee service.

Matthew Stack

matthew@mortgagebrokerrevesby.com.au

www.mortgagebrokerrevesby.com.au

0423 237 242

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