Construction loans offer flexibility
Building – or fixing up – your suburban castle can be a seriously stressful exercise. You need a firm project plan (that nevertheless allows for contingencies), backed by a well-organised team. A kindly tyrant with a stick (ie. a project manager) can also be useful.
You’ll also need money, though you won’t want it all in a lump sum at the start. Specifically, you’ll need a home loan with special construction conditions.
Our construction loans let you draw down your loan in chunks or instalments. Most banks offer this facility: most refer to these instalments as ‘progressive drawdowns’ or ‘progress payments’. We use both, but they mean the same thing – individual payments, drawn at various stages of the project, from a pre-agreed loan amount.
The obvious advantage of this loan is that you only pay interest on the money you use. To further lighten the load, our construction loans have interest-only repayment options during the build period.
We’ll talk about progressive drawdowns in more detail in How construction loans work (part two in our construction loan series). But first a word about the most crucial element in any construction project. A word about your team.
Your construction team
You’ll have your builder and architect, maybe even a project manager. You’ll also have plumbers, electricians and a horde of sub-contractors (unless you, yourself, are a DIY genius of rare standing). You need a tight, cohesive team – and this requires planning, flexibility and (above all) great communication.
We see ourselves as part of the team, too. If you get a construction loan with us, we’ll assign a banker to you or your broker. They’ll work with you on things related to your loan, notably your progressive drawdowns and loan repayments.
If your situation changes at any time during the build, get in touch with us pronto. Our second story discusses what happens if there's a cost overrun.
The usual stages of construction
A typical building project has several stages.
- Preparation – Includes plans, permits, connection fees, insurance etc.
- Base – Includes concrete slab, footings, pad and base brickwork.
- Frame – The house frame is complete and approved.
- Lock-up – The windows and doors, roofing, exterior and insulation are all done.
- Fixing – Examples? Your kitchen cupboards, appliances, bathroom and toilet are all in. Plumbing and electrics are done. Your home’s plastered and painted.
- Completion – Fences up. Site tidied. The builders receive their final payment.
How do you get a construction loan?
The first thing we’ll ask is whether you’re going to build your home yourself (ie. owner-builder) or use a registered builder. The requirements for each are slightly different.
But in both instances, we’ll ask you for a suite of documents. These include council plans and permits, your insurance provisions, a copy of your fixed-price contract (if you’re using a builder), and your Progressive Payment Schedule (if you’re doing the work yourself). Our brochure, Your Guide to Building and Renovating (PDF, 265KB), has the details.
Provided your documentation is in order – and subject to you meeting normal lending criteria – we’ll approve your loan. But keep in mind that each progressive drawdown has further conditions. We'll talk about this more in our second story.
Our valuation requirements
Before you start, we’ll need an ‘as if complete’ valuation – an estimate of the market value of the land and proposed building/renovation. This ensures the amount of the loan is realistic – and that you have enough to get the job done. This protects you and us.
With registered builders, we’ll also check the quoted cost of construction. We’ll look at the plans, specifications and a signed fixed-price contract. These must meet industry standards (eg. Master Builders Association or Housing Industry Association).
For owner-builders, we’ll check the cost of construction using the plans, specifications and costings you give us. We may ask a Quantity Surveyor to confirm your projected building costs.
There’ll be further inspections during the build: our second story has more details.
The building work – and its workers – must be safeguarded. You’ll need to take out the following insurances before you can make any drawdowns.
- Builder’s All Risk insurance: Covers risk to the building during construction.
- Domestic/Home Warranty insurance: You’ll need this if you’re using a registered builder. It covers risks such as non-completion by the builder due to death, insolvency or disappearance (!). Also covers structural defects due to builder negligence.
- Public Liability insurance: Covers risks such as damage to property and injury to individuals.
Right. You’re ready to build! Well, almost. Remember you have some other homework to do first. For instance, your building plans must be approved and a relevant building permit issued before we consider a loan.
It can be a complicated process and, of course, no two construction projects are the same. Your Guide to Building or Renovating (PDF, 265KB) should answer many of your questions and our specialist bankers will be able to help you with the rest. While they mightn’t know all 1731 shades of white – or what’s best for your bathroom – their construction loan knowledge is considerable.