4
or g in d il Bu g in at ov en r TI PS
FO R
A
B E T T ER
CON ST R U CT ION
LOA N
ONE Get everything together
IF YOU ARE BUILDING OR S U B S TA N T I A L L Y R E N O VAT I N G YOUR HOME, YOU MAY NEED TO APPLY FOR A CONSTRUCTION LOAN. THIS TYPE OF LOAN IS DIFFERENT F R O M A S TA N DA R D H O M E L O A N . A CONSTRUCTION LOAN COVERS THE C O S T O F B U I L D I N G O R S U B S TA N T I A L L Y R E N O VAT I N G Y O U R H O M E . T H E L O A N I S R E L E A S E D I N S TA G E S W H I C H W I L L A L I G N TO T H E S TA G E S I N Y O U R BUILDING CONTRACT. GENERALLY THE LOAN REPAYMENTS WILL BE INTEREST ONLY DURING THE BUILDING PROCESS AND CONVERT TO A PRINCIPLE AND INTEREST LOAN AFTER THE BUILDING IS COMPLETED.
When you apply for any home loan, the lender will ask you to provide information about your income, assets and debts. However, if you apply for a construction loan, the lender will also ask you for information about what you intend to build. For example, you may need to provide: >>
Approved plans for the construction
>>
A fixed price contract from the builder
>>
A detailed list of fixtures and fittings
>>
Any other council approvals that are required to complete the build.
S M A L L E R R E N O VAT I O N S MAY NOT NEED A CONSTRUCTION LOAN
If you are not making major structural changes to your existing home, you may not need a construction loan. You may be able to borrow against the equity that you have built up in your home to fund the costs of the renovations. Before you start however, you should check with your lender whether they allow the renovations that you are planning.
THREE
Knock down and rebuild, or house and land?
You might be buying a house and land package. Or perhaps you are looking at a knock-down rebuild. The loan process for these scenarios is a little different. ARE YOU AN OWNER-BUILDER?
TWO
What’s it worth?
The lender will organise for a valuer to review your plans and inclusions and provide an ‘as if complete’ valuation. This is what they estimate your property will be worth once it’s finished. They take into account the value of the land, plus the amount that you are paying the builder. They look at completed properties in the area to determine the final value. The lender will then advise how much you are able to borrow based on this valuation. It’s important not to over-capitalise on your home, so the valuation can help you to negotiate a price with the builder.
If you are an owner-builder, you will need to provide additional documents to the ones we’ve noted above. These include copies of council certified approved plans, permits, licenses for construction works, full construction costs, timing schedules, invoices, and insurance policies. You may not be able to borrow as much as an ownerbuilder as you would if you were contracting to a builder under a fixed price contract. Some lenders, for example, may only lend you a maximum of 60% of the ‘as if complete’ valuation. So you should consider carefully your financial position if you are going down this route.
KNOCK-DOWN REBUILD If you have a home that you want to knock down, with a view to building a brand new home, you need to contact your current lender prior to starting any building work. The lender will want to know what you are building and may wish to restructure your loan to suit the construction process. You may also find that your current lender does not provide construction loans – in which case you will have to refinance your current loan and apply for the construction loan. This can be done at the same time. You should check that your house insurance is valid during the building process, particularly if you are living in part of the house. You may need a separate policy to cover the building works.
HOUSE AND LAND PACKAGE A house and land package is usually available through major developers, who purchase the land when it is initially released by the Government. They may offer a specific house for the block, or they may allow you to choose from a range of home designs. You generally have to use their preferred builder. Getting a loan for a house and land package usually consists of two steps: buying the land then building the house. The loans can be arranged separately, but are usually bundled together. You can buy the land using a standard home loan contract. This loan will settle first. You will also apply for a construction loan to fund the cost of the build. If you are buying a house and land package through a developer they may require you to pay a deposit based on the total cost of the land and the construction. However, you may only have to pay stamp duty based on the value of the land (excluding the value of the house).
B U I L D I N G O N VA C A N T L A N D You can purchase vacant land with a view to building a house in the future. Again, you will need to have 2 loans – a land loan and a construction loan similar to the house and land package noted above. But you have more flexibility in that you can choose the builder. Most lenders will require you to have a fixed price building contract to secure the loan.
With a standard home loan, the lender will provide a lump sum, which is used to purchase or refinance a property. Your repayments are calculated based on the interest rate, the amount and the term of the loan.
FOUR
Progress payments
However, with a construction loan, the lender releases the loan amount in stages that correspond to the stages outlined in the building contract. These are called progress payments. This aims to ensure that the builder is paid for the work they have completed. Your repayments are based only on the amount that
The loan process
The process for getting a construction loan is a little different to a standard loan.
STEP 1.
ACTION ITEM
WHO?
APPLY FOR A CONSTRUCTION LOAN
You Milestone
Milestone will help you to apply for the loan. You will need to provide evidence of your income, assets and any other debts. You will also need the approved construction plans and a fixed price contract from your builder. 2.
has been drawn down. 3.
SETTLEMENT ON THE LAND (IF APPLICABLE)
You
If you are buying the land separately you will generally need to settle on this land prior to the start of construction.
Conveyancer Lender
MAKING PROGRESS PAYMENTS
You Conveyancer Lender
You can then settle on the construction loan. The first payment is the deposit and is generally paid by you. The next payment should be paid by the lender and will generally require a valuer to check that the construction works are on track. A valuation is required before the first progress payment. 4.
T H E S TAG E S C A N B E D I F F E R E N T D E P E N D I N G O N T H E LENDING, BUT THEY ARE GENERALLY:
1. Deposit: This is paid after settlement of the land (if applicable) or upon signing up the builder. It is paid before construction begins. Generally you will have to use your deposit or equity to pay for this stage. 2. Slab or base stage: This stage is paid after the foundation slab has been completed. 3. Frame stage: This is paid after the exterior frame or walls are in place. It covers partial brickwork, the roofing, trusses, and windows. 4. Lockup: This stage is paid after the roof, external doors and windows are in place. It generally signifies that the building can be locked up and is secure. 5. Fitout or fixing: This is paid after the internal fittings and fixtures of your property are in place, including plasterboard, cupboards and benches, plumbing, electricity, and gutters. 6. Completion: This is an amount for the conclusion of the contracted build. It also includes any finishing touches such as plumbing, electricity, and overall cleaning.
Typically the lender will arrange for a valuer to check that the building works have been completed before the first progress payment is made and before the last payment has been paid. This check protects you in the event that the builder has issued an invoice without actually completing the works. Your lender may also set aside a small percentage of each invoice until several months after the construction has been completed to allow for any problems with the building works. The final amount is paid after any repairs have been completed to your satisfaction.
CONSTRUCTION COMPLETE
Once construction is complete the lender will get another valuation to check that the home has been built according to the specifications. They will then release the final payment to the builder.
You Lender
DONE
USE THE SERVICES OF A PROFESSIONAL There are literally hundreds of different loan products available today. While that does make it harder to choose the right loan, it also means that there is an ideal
STRUCTURE YOUR DEBT FOR A PROSPEROUS FINANCIAL FUTURE The right loan will allow you to still have it all Milestone’s approach looks at all your financial goals – not just how much you can borrow based on the standard questions. We look at your situation in detail to make sure the loan you take on meets your needs now and into the future.
Milestone’s dedicated mortgage brokers can help you with loans for: >>
Your dream home
>>
Your first home
>>
Investment properties
>>
Construction and renovation
>>
Business and commercial properties
>>
SMSF loans
For more information about finding the right loan for you, contact Milestone Lending Solutions on (02) 6176 3110, email us at info@milestonelending.com.au or visit our website milestonelending.com.au.
lending solution for you out there. It’s just a matter of finding it. And that’s where a professional mortgage broker comes in. A mortgage broker will help you navigate the different lenders and loan options available. They will also help you work out which features you really need and which ones you can do without. This can save you both money and time. Remember that your situation might not fit the norm – you may have a low deposit, be a small business owner or have a complex personal situation that impacts your finances. A mortgage broker can look at these factors and determine which lender will best be able to meet your needs.
Milestone Financial Services ABN 68 100 591 508 trading as Milestone Lending Solutions is an Authorised Representative and Credit Representative of AMP Financial Planning Pty Limited, Australian Financial Services Licencee 232706. This document contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. If you decide to purchase or vary a financial product, your financial adviser, Milestone Financial Services Pty Ltd and other companies within the AMP Group may receive fees and other benefits. The fees will be a dollar amount and/ or a percentage of either the premium you pay or the value of your investment. Please contact us if you want more information on (02) 6102 4333.