If you're building a home you may have the option of a construction loan. This type of home loan is designed for people who are building a home and has a different loan structure to home loans designed for people buying an existing home.
What is a construction loan?
A construction loan is a type of loan is most commonly set up as a progressive drawn-down. This allows you to draw down the loan (or increase your borrowing amount) as needed to pay for the construction progress payments.
In most instances a construction loan be interest only during the time-frame your new home is being built, or for the first 12 months. After this period your loan will then revert to a standard principal and interest loan.
Once your construction loan is approved, your bank will be able to make payments to your builder during each stage of construction. As each stage is completed by the builder, your lender will require you to present an invoice from your builder before it they will issue a payment.
Your bank will typically send someone to check on the progress of construction before releasing the next payment to your builder.
When do repayments start?
Your repayments will start after Settlement of your new home. If buying a completed home, Settlement means the day you move in. If you have a house and land package, Settlement will be the day you own the land, the building then has to begin.
With a construction loan, your bank will only charge interest on the amount of the credit that was drawn at a particular build stage.
For instance, if you get an approval for a $440,000 construction loan and have only used $240,000 for the land and deposit so far, interest will only be charged on the $240,000 you’ve used.
For example, let's assume the interest rate is 3%. At this stage, your interest only repayments may sit somewhere around $138 per week. During the build, your loan will increase as the bank releases funds. Therefore your repayments will gradually increase.
How much will I pay?
The total repayment amount during construction can vary based on a number of factors including: Interest rate, build time-frame, loan amount etc. As the buyer, it's important to factor repayment amounts into your budget.
When purchasing your new home through MWC, we will provide you with the projected repayment amounts that you can expect you pay. This will be an approximate amount and calculated based on a 6 month build time.
These projections will help you to budget more effectively.
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