The difference between a construction loan and a standard home loan is that instead of a lump sum payment at settlement, the loan is usually drawn down in stages. Payments (or draw downs) coincide with the initial purchase of the land followed by a number of key construction stages. So therefore you aren’t paying the full required payment until your home is completed.
For instance, if you have borrowed $300,000 for a house and land package, but have only drawn down $140,000 to pay for the land, you only pay interest on the $140,000 not the full $300,000. This type of loan is ideal for building, as you only pay interest on the amount you draw down.
The building process
Before the builder starts, you will need to have paid a deposit to the builder as well as paid a deposit for the land if you are buying land at the same time. Progress payments are usually broken up and paid in 5 stages:
- base stage
- frame stage
- lock-up stage
- fixing stage, and
- completion stage.
As work progresses you will need to make these stage payments to the builder. Depending on your loan structure progress payments can be paid directly by your bank on the presentation of a new invoice. An alternative loan structure can be used whereby you use a line of credit to fund the construction stages.
If you are building an investment or require a construction loan, we are here to help – contact us for more information.