Welcome 9 First Home Buyers 9 The Concept Of Construction Loans

The Concept Of Construction Loans


If building your dream house is on the cards in the near or distant future, then it’s worth familiarising yourself with the concept of construction loans.  

Designed to be a leg up for the building industry during the height of the pandemic just shy of two years ago, the HomeBuilder scheme aimed to provide eligible owner-occupiers with a grant to build a new home, or to substantially renovate an existing home or buy an off-the-plan home/new home. Combined with other federal and state government incentives such as the First Home Owner Grant and the early release of superannuation, Australians from all walks of life opted to build their dream home from scratch. 

Even though submissions for the HomeBuilder scheme closed over six months ago, it would seem that the trend has continued. Home ownership is generally considered as one of the key pillars to wealth generation here in Australia, but which path you opt to take as a means to get there is entirely up to you. As such, if you’re thinking about building your own abode from scratch, then understanding how construction loans differ from standard home loans is a must. 

Construction Loans Explained

Imagine if you had just purchased a block of land with the intention of building, but you weren’t aware that you needed a construction loan pre-approval in order to do so. Unfortunately, this isn’t an uncommon pickle, and many Australians get caught off guard with the rules linked to building their own homes on a day to day basis. 

Loans issued for construction purposes typically have a different structure than standardised home loans used for the purchase of existing dwellings. Construction loans are specifically designed for people looking to build their own home from scratch, or those who intend on undertaking significant renovations. 

With a construction loan, the borrower will generally receive instalments of the loan at various stages of the build or construction, as opposed to receiving it all at the start in one lump sum. As a general rule, the borrower only pays interest on the amount that is drawn down, and not the total loan amount. 

In order to minimise exposure to risk for both the builder and the homeowner, the five stages of construction that the progress payments will be issued are:

  1. Base Stage (foundation of the property, slab or base, and can cover ground levelling or plumbing)
  2. Home Frame (can cover partial brickwork, roofing, trusses or windows)
  3. Lock Up (building enclosure, external walls, windows and doors)
  4. Interior Fit Out (internal fittings and fixtures, plasterboards, partial installation of cupboards and benches, plumbing, electrical or gutters)
  5. Completion (finishing touches such as plumbing, electrical and overall cleaning) 

On top of this, most construction loans are interest-only for the duration of the build, so while your home is being built, your costs are kept to a minimum. After this time, the loan reverts to principal and interest. Construction loans operate in this fashion as a means to cover a borrower when working with a builder as a means to pay them based on the work that’s been completed, and to incentivise them to see the project all the way through to the finish line. 

If you’re unsure whether building your own home or purchasing an existing property is the right choice for you or not, it’s always worth speaking to the professionals before making the commitment. While banks offer many products and services, home loans are the speciality of mortgage brokers. Arguably, the superpower of a mortgage broker is their ability to turn the complexities of a lender’s policies into black and white information, which can be invaluable when it comes to making decisions about your financial future – but where do you find one?

The big attraction of building or buying your own home is just that – it’s yours, once you’ve paid back the banks of course. Apart from having somewhere to live, the quest for home ownership is also about having a long term investment strategy. If we’re looking at it from the viewpoint of decades instead of months, generally house prices do rise, and so does the value of your investment.

With a background in banking, finance, business development and project management, there’s no better advocate to have on your team than Nikki Berzin. As a fully qualified mortgage broker and director of Cherry Lending & Finance, Nikki is passionate about all things finance, and empowering her clients with the tools to hit their property goals is what she does best.

If you’re looking to get into your first home, purchase an investment property or even want to look at your options for refinancing, the first step is starting the conversation. Get in touch with Nikki today, or call her directly on 0427 374 155 to bring your mortgage dreams to life.

Disclaimer: Your full financial needs and requirements need to be assessed prior to any offer or acceptance of a loan product.  Subject to lenders terms and conditions, fees and charges and eligibility apply.

Credit Representative 499652 is authorised under Australian Credit License 389328.