Construction Loans 101

Building your dream home from the ground up is about as exciting as it gets, especially if you’re a first home owner. When it comes to borrowing to build though, it’s definitely worth exploring your options to see what loan might work best for you and your build.

If you’re looking to build, you could be in the market for a construction loan, but what is a construction loan and how is it different from a regular home loan?

Let’s break it down...

What is a construction loan?

A construction loan can be used for a couple of things - to build a home from scratch or to fund major structural work or renovations to an existing property. Construction loans are structured differently to a typical home loan though. Unlike borrowing to buy a property, a construction loan has progress payments that are only released to the builder at each stage of construction, rather than as one lump sum upfront.

With a construction loan, you’ll make interest only payments on the amount you’ve drawn down from your total loan. So, if you’ve drawn down $100,000 in progress payments from a total construction loan of $400,000, you’ll only pay interest on $100,000. Once construction is done and dusted, your loan repayments will then switch to principal and interest.

Construction stage payments

With a construction loan, progress payments are usually released to the builder as each stage of the build is completed:

• Deposit - builder is paid their deposit to kickstart construction.
• Slab - released when the foundation slab has been poured.
• Frame - once the outer frame or walls are in place.
• Lock up  - when external doors and windows are in place.
• Fit-out - once the internal fit out and fixtures have been installed.
• Completion - when the build is complete.

Pros and cons

Before you decide if a construction loan is the right way to go for you, it’s a good idea to be across some of the pros and cons that come with this type of loan. 

Pros

• Interest savings: With a construction loan, you’ll make interest only payments on the actual amount you’ve drawn down, not on the total loan amount, which means you could save a bundle on interest during the build. That’s a big thumbs up.
• Helps protect you from financial loss: Another plus is that construction loans can help shield you against shoddy construction or incomplete work with progress payments only released to the builder when each stage of the build has been finished to the required standard. Tick!
• Extra payments: You can usually choose to make extra payments into a construction loan along the way too, so you may be able to pay your loan off sooner.

Cons

• Larger deposit: You may need to have a larger deposit to borrow since borrowing to build is seen as being riskier than borrowing to buy an existing property.
• Progressive payment stages: As each stage of your build is carried out, from slab to completion, your lender will assess the work that’s been done before they release payment to your builder which can add some time to the build.
• It’s complicated: A construction loan isn’t as straightforward as a regular home loan, so be prepared for a bit more paperwork and some to-ing and fro-ing with your bank and builder along the way.

Can I borrow to build a home with UniBank?

Yes! Our Your Way home loans can be used as construction loans – subject to loan approval. They’ll give you the flexibility you need to do your home loan, your way + great interest rates and other great package benefits too:

• Fixed and variable rate loan options
• Free redraw (for variable loans)
• Unlimited additional repayments on variable loans
• Ability to split your loan
• Great package benefits + discounts exclusively for essential workers with Your Way Plus. 

Visit our website for more info here 

Keen to talk through your options?

Whether you’re looking to build the dream sooner rather than later, or you’re just looking to do some home loan homework, you can make a booking to talk to one of our Lending Specialists at home, over the phone, or via video call. 

Book a call back