Building a home – or undertaking a major structural renovation project – can challenge even the best-laid plans. But our construction loans take a lot of stress out of the equation. Let’s look at how they work.

Give me the main points

  • You access money as you need it. You only pay interest on what you draw down.
  • You can pay interest-only through the build.
  • Take time to plan. It’ll help the building process run smoothly and keep you within budget.
  • Keep us in the loop as you build.

We saw in our first story how our construction loans can help you navigate the cashflow challenges of a big project. By allowing you to draw on your loan bit by bit as needed – a facility called ‘progressive drawdown’ – your interest payments are lower than if you borrowed the whole amount upfront.

In this second story in our series, we’ll look at progressive drawdown in more detail.

What is progressive drawdown?

A progressive drawdown – or progress payment – is the portion of your loan funds we release at each stage of construction.

If you’re using a registered builder, we’ll pay them direct at each stage of the build (assuming you’ve met our requirements). Among other things, we’ll need to see the builder’s invoices as well as a progress claim certificate.

If you’re an owner-builder, we’ll release the funds to you when we get itemised invoices and receipts – and provided you meet our other requirements. We’ll need these at each completed building stage. Importantly, they must match up with progressive payment schedule we agreed to when we approved the loan.

Please note we charge a $60 fee for each progressive drawdown.

Paying interest-only on your loan

Our construction loans are designed to ensure you don’t draw more than you need – or exceed the construction costs you’ve budgeted for.

That’s why our loans begin with an interest-only period. This means you’ll be paying interest-only – and only on the amount you’ve drawn down.

What’s special about a construction loan

Our construction loan is a standard home loan – with additional building conditions.

So what’s the difference? Let’s look at two $500,000 loans – one standard, one construction – to see how it works.

If you have a standard home loan – without building conditions – you must draw down the total loan by a certain time. The full $500,000. That means you’re paying interest on the whole loan amount – all $500,000 – from the start.

But if you have a construction loan for $500,000, then you draw down what you need in instalments, to cover the costs of each part of the project. If your first invoice from the builder is for, say, $50,000, then that’s what you draw down. That’s what you pay interest on. You only pay interest on the rest when you draw it down later in the project.

But remember you'll also pay loan interest on any fees and charges debited to your loan account.

One more thing. We need the paperwork in order (all invoices etc.) before we release each progress payment. Our brochure Your Guide to Building and Renovating (PDF, 265KB) has more info.

Inspections and valuations?

Before you start building, we’ll need an ‘as if complete’ valuation – an estimate of the market value of the land and proposed building/renovation.

We also require further inspections and valuations through the project to be sure everything’s on track and within budget.

Cost overruns

Cost overruns are when the building expenses exceed the planned progressive payments we agreed to at the start of your loan. We understand this sometimes happens. You might change your cladding from timber to brick. You might opt for wooden joinery instead of aluminium. Or you might simply decide you want double powerpoints instead of single ones.

If you exceed the amount we agreed upon, talk to us ASAP about next steps. If we can’t provide additional funding, you’ll need to cover the extra cost yourself.

Your final payment

Once your mighty work is done, we’ll need some last bits of paperwork before we release the final tranche of money. Our brochure Your Guide to Building and Renovating (PDF 265KB) has the details.

Once the interest-only period of your loan ends, your loan becomes principal and interest. If you finish building before then, you can change the loan over to principal and interest. You’ll need to contact us.

Then what? Well. You host the most epic housewarming ever with an outlandish costume theme and SingStar karaoke. Elvis’ Suspicious Minds is a sound bet for the guys; Beyonce’s Single Ladies also never misses. Maybe even some Macarena!

Make sure you invite the neighbours.

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