Finance | 10 November 2020

How Do Construction Loans Work?

by Carlisle Homes

If you’re considering a new build, ask about a construction loan. These loans work in conjunction with the building process to help you keep repayments as low as possible. This is helpful if you’re paying rent or a current mortgage while your new house is under construction.

What is a construction loan?

Construction loans are designed specifically for people building a new house.

The main difference is that they are progressive. Instead of fronting the entire loan up front, the lender makes money available in instalments when it’s due to the builder. Interest is then calculated based only on the funds you have received so far.

Many lenders also offer construction loans which are interest-only during the construction period. Only once the house is built and you’ve moved in do you start paying down the principal.

For example, if you have been approved for a $400,000 loan but have only paid $200,000 to the builder so far, you only pay interest on $200,000. After the home is completed and you move in, you will make principal and interest repayments on the full $400,000. By that time, you will no longer need to pay rent or a mortgage on your previous home.

Once the construction loan has been approved and your new Carlisle home is being built, your lender will make progress payments through the various stages of construction.

The stages of a construction loan

Construction loans are paid in progress payments directly to the builder. Typically, they will be paid in five stages:

1. ‘Slab down’ or base. This pays for the work involved in laying your foundation, including levelling of the ground, plumbing and waterproofing.

2. Frame stage. This payment is for the framing of the house. It might include roofing, trusses and windows, and some brickwork.

3. Lockup. This is when your house is finished to the point where it can be locked and left secure. It includes external walls, windows and doors.

The progressive nature of construction loans enables you to make payments as each stage of the building process is underway, instead of fronting the entire loan up front.

4. Fit out.This payment covers the internal fittings and fixtures, including plumbing, electricity and gutters. It might cover the installation of cupboards and benches, tiling and flooring.

5. Completion. The final amount covers anything that needs to be finalised so you can move in. That might include final payments to builders and other contractors. It also covers painting, a final clean and any other details needed.

Getting approved for a construction loan means you will be subject to the normal lending criteria, including relevant documents and details of your income and expenses.

How to access payments

When you apply for the loan, your lender will want to see your fixed-price contract with details of when each stage is estimated to be complete and how much will be due at each stage.

As the build progresses, you will need to confirm that the work is done and usually also provide the lender with an invoice from your builder. You will then complete and sign a drawdown request for the release of the funds.

If you make choices that increase the cost after the contract is signed (for example, upgrading to designer fittings) you may need to meet this extra expense out of pocket.

Inquire about a construction loan to help save you money on repayments during the building process of your new Carlisle home today.

Carlisle works with trusted land developers to offer a fixed price house and land package for all home buyers. No hidden extras, no additional costs. You’ll know exactly how much you need for your construction loan, with no nasty shocks at the end.

Interested to learn more? Speak to one of our in-house construction finance specialists for non-obligatory financial advice including finding out if you’re eligible for the various grants and assistance that might put you one step closer to your dream of owning a home.