Construction loans are different from typical home loans. Construction loans are intended to help you create your ideal structure while mitigating project overruns and delay risks. Every bank has different procedures, but you should expect to receive only some of the amount once you sign all the paperwork. The loan is frequently paid back in a series of “progress payments” or “drawdowns.” These are percentages of the money you’ll borrow, meaning you’ll get a set amount each time you start a new project phase.
In Australia, most people have these five withdrawals. These are the major stages of the construction project:
- Slab – The slab is being poured; the frame is raised with the roof on top
- Lock-up entails locking up the property’s shell
- Utilities – installation of modern facilities
- Final – finishing touches and final inspection for completion
Strict Guidelines Must be Followed for Loans
Registered builders must provide lenders with invoices and an activity report. Before requesting the next drawdown, an owner-builder must also send receipts and bills. A bank assessor will then assess the building at each drawdown stage to confirm that each step is finished and that everything complies with its lending and legal criteria. Only after the auditor’s approval will you make the payment.
Save Money for Unexpected Expenses
Lenders will analyse your loan’s serviceability and only advance your funds if they are confident in your ability to repay. It is best to be cautious with the amount borrowed and avoid pushing it to the limit. Always aim to have a buffer in place from the start. You may need to use this for unforeseen expenses.
You should inform your broker if the project prices exceed your budget. They can offer guidance and show you your alternatives. A bank will frequently accept an equitable solution. However, if a bank says “no” to additional credit, the completion costs will rest on you.
Documentation Required For Construction Loan
The bank will examine the worth of your land and the approximate expenditures for materials and labour. All of it will play into the construction finance model. In general, you will be required to furnish the following documents:
- A detailed blueprint of the structure, permissions and licences obtained from local authorities, and a copy of the standard contract with licenced employees.
- Payment schedule if you are a builder owner; documentation of your various insurance policies, such as those covering occupational injuries.
- You will also be asked to make sure you can afford the construction loan so that they will ask for information about your annual income, credit history, and assets. You must provide valid documentary evidence to back up your claims.
Benefits of Construction Loans
Building your project from scratch with construction financing provides you with the following benefits:
- The ability to own a customized workplace or office, where and how you want it, without having to save for years or even decades
- Assurance that builders will do their work – contractors and builders will be paid based on the progress of their work. If they provide poor service, the lender may withhold payment until substantial improvements are demonstrated.
- Better money management—when you have a lot of money, you may be tempted to buy costly things. Drawdowns keep most borrowers from becoming careless with large sums of cash, allowing them to save money.
Potential for cost savings – Construction loans are typically interest-only loans until the construction is completed, with interest levied only on the total amount disbursed at any project stage. This helps with cash flow when the property is unlivable or cannot be rented.
When making such a significant decision, you should always seek professional counsel. Construction finance can be complicated and necessitates the assistance of a professional.