Planning on constructing a new home?

A construction loan is very different from a residential home loan. With this type of loan the lender will factor in the total amount that you will pay your builder. The lender will then organise what is called “progress draws” which pays the builder based on project completion stages.

But before that – you will need to find a builder and fulfil a number of bank requirements.

Let’s discuss these below.

Finding a good builder

Part of the requirements to secure a construction loan is to engage a licensed builder.

Here are 3 points that you need to consider:

1. Selecting an experienced home builder

The builder must be licensed and insured for home construction projects otherwise your loan may not be approved. On top of satisfying bank requirements, a reputable builder will also ensure that you get a quality build with no workmanship issues.

2. Know the cost of construction

Majority of banks and financial institutions require that you have a signed building contract when applying for a construction loan. So your builder of choice must be able to produce a contract prior to the loan application.

3. Understand how long the build will take

Your loan repayments may be interest-only during the construction phase. This means that you should want to minimise the amount of interest you pay as much as possible and one way to do is to identify how long the build will take.

Other important bank requirements

You may need to give the bank the following documents:

Council approved plans
Builders workers compensation and public liability insurances
Fully executed and dated building contracts
Progress payment schedule

The progress payment schedule details how your builder wants to be paid. Builders will often try and load up the early stages and have less coming through on the later stages. Typically a progress payment schedule should look something like the following (although some small variations are acceptable with some lenders and this is only for a standard build):

Deposit & base stage 15%
Frame stage 15%
Lock up stage 35%
Fixing stage 20%
Practical completion 15%

Once you’ve given the banks these documents, they should have enough to proceed through to formal or unconditional approval of your loan. At this point your bank will issue the loan contracts and a letter to the builder that they can start construction.

Once you have accomplished all of these the you have finally jumped through all the bank’s hoops and are ready to start the journey to building your new home.

Need help finding local builders and other professions?

If you want to find reliable builders, tradies and professional services to help you when buying, selling, building or renovating, you can also try one from our Tradebusters Connect local Free Top 3 Local Choice Directory.

The details of recommended Top 3 Local Choice businesses can be found here and you can contact them directly.