Construction Loans

What is a Construction Loan?

A Home Loan Construction Loan is a facility to provide you with the funds required to pay your contracted builder to build your new home as set out in the fixed price building contract. Not all lenders offer construction loans, as specialised lender teams are required to handle a loan construction payment process. Once your loan facility is approved by the lender’s credit department or team, your loan file is handed to the construction team, specialised in the loan construction process to assist and safeguard you with the required documentation for a loan construction or even a renovation process.

 

Construction loans can be used to;

+ Finance the construction on existing purchased land,

+ Finance the purchase of land and to construct your new home,

+ Finance renovation to an existing dwelling or to a new residential dwelling,

+ Finance the demolition of an existing residential dwelling to construct a New Residential dwelling

+ Finance the construction of a prefabricated or kit home which will be fixed permanently onto land, all services need to be connected.

 

When it comes to construction, building, renovating or building a Granny flat or Second dwelling, you need a lender with the right construction loan products which can grow as your home gets built or renovated, allowing you to draw funds at each stage of the construction or renovation process.

Additionally, with construction or renovating loans, some lenders are extremely good at these construction processes or extremely awful due to poor systems or lack of staff to assist clients during the construction process, since lenders control the payments to the builder. With the vast variety of lenders available to us, Neomoney knows which lenders handle the construction process well and which lenders handle the construction process poorly.

Neomoney has a wide range of lenders with specialised construction loan processing teams that offer exclusive construction loan processing services, meaning you can confidently know payments to your builders at each stage will be handled promptly and efficiently, allowing you to concentrate on other more important elements in your construction stages.

Do I Need Pre-Approval?

We would strongly suggest you obtain a Pre-Approval to know the maximum borrow capacity to assist with your new home construction.

You can read more on Pre-Approved Loan Here >

What Do You Need To Provide For A Construction Loan?

Further to the Pre-Approval documentation requirements, you will need to provide a builders contract or formal tender, building plans and building specifications (non-council approved plans are accepted at this stage), any quotation that maybe ‘Out of Contract’. Apart from the Pre-Approval documents, these construction documents are required to be submitted to the lender who will instruct they appointed valuer firm to value your proposed home and land construction as an ‘As If Complete’ valuation to determine if the loan would proceed on the submitted construction documentation provided. The lender’s final loan amount is based on the ‘As If Complete’ valuation.

What Type Of Construction Insurance Would I Need?

To ensure you are adequately protected and mandatory with lenders the following types of insurance will need to be provided which are arranged by the builder or construction agency, these insurance policies will need to be in place prior to a loan submission.

Builder’s Insurance of Works

The builders insurance covers the physical risk to the building during construction. This policy is replaced by a standard Domestic Home building insurance policy, which you need to obtain at lock-up stage.

Domestic Home Warranty Insurance

Domestic Warranty Insurance is provided by your registered builder to you the customer. This type of insurance covers risks such as non-completion by your builder due to insolvency, disappearance, death, structural defects due to builder negligence, etc.

Worker’s Compensation

This Insurance is arranged by the builder. Covers risks such as medical expenses for the builders injured workers on the job or work-related illnesses.

Public Liability Insurance

This Insurance is arranged by the builder. Covers risks such as medical expenses for the builders injured workers on the job or work-related illnesses.

What are the payment stages in a construction loan?

Depending on the lender there are generally 5 stages however a few lenders offer a 6th stage to the construction payment or drawdown payment stage. In the builder’s contract, the builder would normally have 5 stage payments which are outlined in their contract who request payment at each of the completed stages. At each of these stages, a builder or construction agency will present you with an invoice to forward onto the lender for payment.

In order to make this staged payment to the builder, the lender requires the invoice and a progress payment authorisation form signed by all applicants or borrowers on the loan agreement. These stages are mentioned further down on this page.

You will need to ensure the construction stages are being completed as scheduled in the builders’ contract.

Some lenders may require a valuation at every stage of the 5 drawdowns or payment and some lenders only value the construction at the final staged payment or drawdown to ensure the builder meets all codes and outlined in the builders contract and additionally to safeguard the client if the builder has neglected to fix any unfinished works to the property.

Stages in construction and payment progress:

In the initial preparation stage of the building process with the builder or construction agency, you would sign a construction contract either a Master Builders’ Association or Housing Industry Association fixed price contract. By signing a fixed-price contract, this would enable the builder to start the preparation of plans & specifications, obtaining approved plans and permits, proceeding with soil tests, insurances, etc.

In the loan application process, the lender will require copies of the fixed price contract, council approve plans, specification, permits and insurances, therefore it’s important to make sure these are all available prior to a loan submission.

STAGE 1
Cement Slab or Base Stage

Concrete slab complete or footings and base brickwork completed.

STAGE 2
Frame Stage

House frame complete and approved by building surveyor / inspector

STAGE 3
Lock-Up Stage

Windows / doors, roofing, brickwork, insulation.

STAGE 4
Fixing Stage

Plaster, kitchen cupboards, appliances, bathroom, toilet, laundry fittings/tiling, heating, fixing/internal doors, etc., plumbing, electrical, painting.

STAGE 5
Completion Stage

Fencing, site clean-up, final payment to builder.

Construction Payment Processes

First Progress Payment

Once the construction is underway and assuming the lender is a 2 stage valuation lender, (2 stage meaning, valuation at 1st stage and final stage) the first progressive payment being made by the lender, who will require the following documents:

  1. Copy of builders first stage invoice as per the building contract
  2. Copies of council-approved plans and permits & specifications
  3. Copies of the required insurance policies as outlined above
  4. Signed borrower’s authorisation form to make progress payment to the builder (Authority must be signed by all borrows or parties on the loan).

Note: A lender will withhold funds until all of the above requirements have been supplied.

 

Second, Third & Fourth Progress Payments

  1. Copy of builders second, third or fourth stage invoice as per the building contract
  2. Signed borrower’s authorisation form to make progress payment to the builder (Authority must be signed by all borrows or parties on the loan). A few lenders only require the borrower to sign and approve the builders staged invoice amount.

 

Firth & Final Progress Payment

The final progressive payment requires a few more steps to be completed prior to a payment being made and the following documents would need to be supplied:

  1. Copy of the occupancy certificate for new homes
  2. Copy of the final inspection certificate
  3. Copy of the general building insurance policy

During this final stage, the lender will organise for a final valuation once the above documents have been provided. The valuation is mandatory to safeguard the lender and the applicants to ensure the builder has met all building codes and construction specifications during the construction of your new property.

 

 

How long would a lender allow for construction?

Most lenders require that the construction or building be completed within 6 to 12 months. If the construction takes more than required you may be up for additional cost and penalties.