Borrowing to build the dream: the lowdown on construction loans

Keen to build the house of your dreams on your own patch of dirt? There’s nothing more satisfying than building your own place from scratch and seeing it come to fruition, but when it comes to borrowing to build, it’s worth doing your homework to see what loans are out there and what’s going to work best for you.  

If you’re planning to build, you might be in the market for a construction loan, but what is it and how does it differ from a regular home loan?

Let’s take a look..

How do construction loans work?

A construction loan can be used to build a home from scratch or to pay for major renos to an existing place. But unlike a regular home loan, a construction loan is structured differently with progress payments only released to the builder at each stage of the build, not as an upfront lump sum. 

With a construction loan you’ll make interest only payments on the funds you’ve drawn down from your total loan amount. So for example, if you’ve drawn down $200,000 in progress payments from a total construction loan of $500,000, you’ll only pay interest on the $200,000 you’ve drawn down. Then, once the build is finished, your loan repayments will switch to principal and interest.

Progress payments

As each stage of construction is completed, progress payments are usually released to the builder:

• Deposit - builder deposit to kickstart your build.
• Slab - the foundation slab is poured.
• Frame - the outer frame or walls are in place.
• Lock up  - external doors and windows are installed.
• Fit-out - the internal fit out is complete.
• Completion - the build is finished.

The pros and cons

It’s a good idea to be across some of the pros and cons before you decide if a construction loan is right for you.

Pros

• Saving on interest: Because you’re only paying interest during the build on the amount you’ve drawn down in progress payments, not on the total loan amount, saving on interest is one of the big pluses of a construction loan.
• Added protection: Another thumbs up for the construction loan is the added protection it can offer, with progress payments only released to the builder when each stage of construction has been completed to a satisfactory standard. 
• Pay off your loan faster: You might be able to pay off your construction loan faster too since you can usually make extra repayments on your loan along the way.

Cons

• Bigger up-front deposit: You usually need to have a bigger deposit since borrowing to build is seen as being a bigger risk than borrowing to buy an existing home.
• Progress payment assessments: Your lender will need to assess the work that’s been carried out at each stage before they release payment to your builder which can add another step to the build process and timeline.
• Extra paperwork: It’s a bit more involved than a regular home loan so you’ll need to do more paperwork upfront and there’s usually a bit more back and forth between your bank and builder along the way too.

Can I get a construction loan with Firefighters Mutual Bank?

Sure can! Our Your Way home loans can be used as construction loans. Subject to loan approval, they’ll give you the flexibility you need to do your home loan, your way + great interest rates and other great package benefits:

• Fixed and variable rate loan options
• Free redraw (for variable loans)
• Unlimited additional repayments on variable loans
• Ability to split your loan
• Great package benefits + discounts exclusively for essential workers with Your Way Plus. 

Visit our website for more info here 

Need a hand to work through your options?

Whether you’re looking to build the dream sooner rather than later, or you’re just working through your options, you can make a booking to talk to one of our Lending Specialists either at home (Covid-depending), over the phone, or via video call. 

They can help you weigh up the pros and cons, do the math and find the best value home loan to help get your dream home off the ground.

Request a call back