Understanding the basics of construction loans

When to apply for a construction loan

Renovating that tired, beaten-up old bungalow? Or maybe you’re finally building that grand home you’ve been designing in your head for years? Whatever you’re working towards, we can help. We offer construction home loans (also known as building loans) using registered builders, with flexible conditions that recognise the cashflow challenges of a major project.

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 project manager can also be useful. 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 and may 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. 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. 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 as soon as you can.

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 – e.g. 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?

Once you’ve chosen a registered builder, we’ll ask you for a suite of documents. This includes council plans and permits, your insurance provisions and a copy of your fixed-price contract including a Progressive Payment Schedule. Our brochure, Your Guide to Building and Renovating (PDF, 257KB), opens in new window, has the details of what you’ll need to provide.

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.

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.

We’ll also check the quoted cost of construction. We’ll look at the plans, specifications and a signed fixed-price contract. These documents must meet industry standards (E.g. Master Builders Association or Housing Industry Association).

Learn more about what inspections you’ll need during the build.

Insurance

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, 257KB), opens in new window should answer many of your questions. Plus, our specialist bankers will be able to help you with the rest. While they might not know what’s best for your bathroom – their construction loan knowledge is considerable.