So, you’re ready to build your dream home or finally tackle that big renovation?
Getting these projects off the ground can be tricky to finance, that’s where construction loans come in.
What is a construction loan?
A construction loan (building loan) is essentially a home or investment loan that, for the duration of your construction period, lets you draw down the loan in instalments rather than in a lump sum. Once the construction is completed, your construction loan will continue as your chosen home or investment loan. With People’s Choice, you can choose from:
- a variable package.
- a one-year or two-year fixed package.
- a standard variable or a basic variable loan.
After your construction loan term ends, you can also choose additional features, such as opting to have a split loan.
We also offer a 12-month interest only repayment option during the construction period, which means lower repayments and more cash in your pockets for when you may need it.
What is a draw down (or progress payment)?
A draw down is the portion of your loan funds we release at each stage of the build as it is completed. By allowing you to draw on your construction loan bit by bit as needed – your interest payments are lower than if you borrowed the whole amount upfront.
How does a construction loan work?
A construction loan allows you to draw down on your home or investment loan in instalments over the course of your construction. The timing of these instalments generally lines up with the six stages of the building process, so that you can provide payment to your builders before commencement of each stage.
The standard stages of construction are:
- Preparation – plans, permits, fees, insurance, etc.
- Foundation – levelling the land, laying the slab, excavations, plumbing, etc.
- Framing – constructing walls, roof trusses, windows, door frames, etc.
- Lock-up – adding everything you need to turn your building into a house and locking it up.
- Fix-up – plastering, sealing, adding your appliances, bathroom installed, etc.
- Completion – site tidied, fences up, and builders receive final payment.
At People’s Choice, the construction period for your loan can be up to 12 months from the date of settlement.
Construction loan deposit
If you’re building a house and applying for a construction loan, you’ll generally need to provide your lender with an approved council plan and permits for your new property, insurance documents and a copy of your building contract. This can then be used by your lender to work out the expected value of your property, as well as your loan amount and required deposit.
Lenders usually require a deposit of 20% of the property value which gives you a Loan to Value Ratio of 80%. For deposits under 20%, Lenders Mortgage Insurance (LMI) may be required.
Can I use home equity for a construction loan?
You may be able to use your home equity to fund a renovation by withdrawing the usable equity to pay for the construction. By doing this, you are increasing the amount you are borrowing from your lender or adding to your existing loan.
If you’re looking to use your equity to build a second home or investment property, your home equity could be used as a deposit for a construction loan. This works by using the equity amount as the deposit, in place of handing over a cash deposit or selling your existing home.
How to qualify for a construction loan
Your lender will want confidence that you can comfortably make your construction loan repayments. To show that your loan is affordable, you may want to have the following records handy:
- Approved council plans and permits
- Insurance documents
- Copy of building contract
Plus, our standard documentation requirements:
- Your income details and employment history – including pay slips, child support, pensions, overtime, allowances, rental income, and commissions. Your lender might also check how long you’ve been employed in your current contract or industry for.
- Your savings history – it helps to show your lender proof that you can save, like having a good account history.
- Expense details – including utility bills, rent, board, loan repayments, credit and store cards, maintenance, and lease payments.
- Asset information including cash savings, value of motor vehicles, shares, bonds, property, and furnishings.
- Residential and employment details for the last three years.
- Australian driver’s licence number and expiry.
Read more about what to know before you apply for a home loan here.
How to apply for a construction loan?
Ready to apply? First, you may want to check how much you can borrow with our home loan calculator and borrowing power calculator. You can also calculate your additional costs with our stamp duty and land tax calculator.
To take the first step toward applying, submit our online application form here.