Understanding Construction Loans for Land Purchase
Purchasing land and building your dream home is an exciting journey, but it requires a different type of financing than buying an existing property. Construction loans are specifically designed for this purpose, allowing you to purchase suitable land and fund the construction of your new build in one streamlined application process.
Unlike traditional home loans, construction loans work on a progressive drawdown system. This means you only pay interest on the amount drawn down at various stages of the project, rather than the full loan amount from day one. This approach can save you thousands of dollars during the construction period.
How Progressive Drawdowns Work
The progressive drawdown system is the cornerstone of construction financing. Here's how it typically works:
• Land purchase - The first drawdown covers the land acquisition
• Slab stage - Funds released once the foundation is complete
• Frame stage - Money available when the frame is up
• Lockup stage - Drawdown when the roof and walls are complete
• Fixing stage - Funds for internal fit-out including plumbers and electricians
• Final stage - Completion payment once construction is finished
Each drawdown requires an inspection to confirm the construction milestones have been met. Your registered builder will typically coordinate these inspections and progress payments with the lender.
Interest Rates and Repayment Options
During construction, most lenders offer interest-only repayment options, meaning you only pay interest on the funds that have been drawn down. The interest rate during construction is often variable, though some lenders provide fixed rate options.
Once construction is complete, the loan typically converts to a standard home loan with principal and interest repayments. At this point, you can often choose between variable or fixed interest rate options based on your financial situation and market conditions.
Ready to get started?
Book a chat with a Finance and Mortgage Broker at Coco Finance Broking today.
Planning Your Land Purchase and Construction
When applying for a loan, lenders will want to see detailed council plans and a fixed price contract with your registered builder. The 'as if complete' valuation is crucial - this determines the loan amount based on the property's value once construction is finished.
Key considerations when you make a plan include:
- Location requirements - Ensure the land meets your ideal location criteria
- Council restrictions - Check council regulations for building limitations
- Price range - Factor in both land costs and construction expenses
- Development application - Some blocks may require additional approvals
- Progressive Payment Schedule - Align this with your builder's requirements
Additional Costs to Consider
Construction loans involve several fees that differ from standard home loans:
• Progressive Drawing Fee - Charged for each stage inspection and drawdown
• Valuation costs - Both initial and progress valuations
• Building inspections - Required at each construction milestone
• Council permits - Development and building approvals
• Out of Contract Items - Extras not included in your building contract
It's important to budget for these additional costs when determining your overall price range and borrowing capacity.
Construction Loan Variations
Construction loans aren't just for new builds on vacant land. They can also cover:
• Demolish existing property - Remove old structures and rebuild
• Major home renovations - Significant structural changes
• House & land packages - Coordinated purchase and construction
• Buying off the plan - Pre-purchase of completed homes
For smaller projects, a home improvement loan might be more suitable than a full construction loan.
Working with Sub-contractors and Builders
Your registered builder will manage most aspects of the construction process, including coordinating with plumbers, electricians, and other sub-contractors. However, as the loan holder, you'll need to ensure that progress payments align with the Progressive Payment Schedule agreed upon with your lender.
Most lenders require you to commence building within a set period from the Disclosure Date, typically 6-12 months. This ensures the project moves forward in a timely manner and prevents land from sitting idle for extended periods.
Access Construction Loan Options
As an experienced renovation Mortgage Broker, we can help you access Construction Loan options from banks and lenders across Australia. Each lender has different criteria, interest rates, and fee structures, so comparing options is crucial for finding the right fit for your project.
Whether you're a first home buyer building your initial home or an experienced property owner undertaking a new project, construction loans provide the flexibility needed to turn your building dreams into reality.
Ready to explore your construction loan options? Call one of our team or book an appointment at a time that works for you. We'll help you understand the application process and find the right lender for your land purchase and construction project.
