Have you trawled the property market for your dream home, but you haven’t found it? Then consider building it.
This option has become easier with mortgage lenders that offer construction loans and the help of the Rudd Government, which has tripled the home owner’s grant for newly built homes from $7000 to $21,000 in the lead-up to 30 June 2009.
You will need a
construction loan if you go down the path of building a new home for your family, constructing an investment property or conducting a major renovation on an existing house.
A
construction loan is a loan specifically tailored for a borrower who wants to finance a building construction across several stages. It allows you to draw down money in irregular, small lump sums to suit the unique process of building.
By contrast, a typical home loan is structured so you can draw down the full amount in bulk to pay the seller of your property at once.
When you build a new home, you will need to make payment installments to:
- Place a deposit or full payment on land.
- Reimburse your builder in installments after the purchase of materials or payment of contractors.
- Make progress payments to your builder during building, which may be delayed by wet weather, such as laying foundations, building frames and constructing a roof to bring the house to "lock up" stage.
There are alternatives to taking out a
construction loan, such as using existing equity in another property to finance construction if the borrower has enough security in another investment.
But for most borrowers, a construction loan is a sensible alternative because it helps to reduce interest payments during the first year of construction. As loan amounts are drawn down in installments, borrowers only need to pay interest on the amount drawn down, not the full loan value when they are not even using the full loan immediately.
Four questions to ask your lender about your
construction loan are:
1. Will I need to pay valuation fees to assess the value of my property before each draw-down?
2. Are there any more costs associated with these progressive draw-downs?
3. Is there a limit to the number of draw-downs I can make?
4. Will my loan revert to a variable or fixed mortgage on completion of my building works?
To get the best deal on a construction loan, visit a mortgage auction website such as
BidMyLoan.
At a mortgage auction website, lenders will "bid" for your construction loan as they offer you their most competitive rate on a pre-approved loan. You simply need to fill out one online application form, lenders will come forward with their best rates and you can negotiate further with the lender you choose.
To finalise your loan, your lender will ask to see some paperwork such as your contract with a licensed builder, council-approved plans and specifications, and proof that you have current and valid builder’s insurance. Your lender will guide you in the documents you need to provide.
For more information about construction loans, go to
bidmyloan.com.au or call 1300 BID MY LOAN.
This article was brought to you by
BidMyLoan, helping first home buyers, refinancers and investors find a better home loan in Australia.
