In the context of a house and land package acquisition, the land is acquired as a standard real estate transaction followed by entering into a contract to build with a licensed builder on which you can obtain a construction loan. They can be done separately but it’s a good idea to organise them together to give you certainty about obtaining finance for the entire project.
Construction loans involve various draw-downs (set payments) throughout the construction process. The lender will send out a valuer at each stage of the construction before they approve each progressive payment, ensuring each stage has been completed, therefore the funds are made available as required to undertake each stage of the building.
There are typically 4-5 stages:
- Deposit – paid to the builder before construction commences
- Slab – slab of house/flooring is laid
- Frame – walls and timber are erected
- Lock up – the house is secured and can be ‘locked up’
- Completion – all works by the builder is finished
During the construction phase, construction loans usually require interest only payments to be made and, in some cases, no payment to be made until completion of the work. Following completion, these loans can often be converted to a more flexible and suitable loan facility.
Construction Loan Checklist
Here is a list of documents (in addition to the standard documents) the lender will require to approve your loan:
- Fixed Price Building contract
- Stamped, council-approved building plans
- House Specifications
- Copy of builder’s insurance policy
Some key considerations for financing your construction:
- Holding costs during construction – you will have repayments on the land loan as well as interest incurred on each stage of the construction process, so you will need to allow for these payments before you can move in, or receive rental income. Where you save money is on Stamp Duty which is only payable on the land, not the building.
- Contract Variations– It is imperative that you include all works in the contract. If you try to add items as variations later, the lender may not approve further advances and you will need to pay these directly out of pocket. Make sure that you consider the following items:
- Driveways & Paving
- Clothes line & letterbox
- Window Furnishings
- Towel rails & toilet roll holders
- TV Antenna
Financing a house and land package is a bit more intricate than a standard loan, so it’s highly recommended to use the services of a qualified and experienced mortgage broker who can guide you and help you during the entire process.
For a review of your construction requirements contact us directly