There isn’t a shortage of choices when it comes to construction loans in Australia. Home owners have plenty of choice – but it’s still worth knowing what they are and what to look for.
A construction loan is a type of home loan designed for people who are building a home as opposed to buying an established property. It has a different loan structure to home loans designed for people buying an existing home.
A construction loan most commonly has a progressive drawn-down. That is, you draw down the loan (or increase your borrowing) as needed to pay for the construction progress payments.
The amount available to borrow will be partly based on the value of the property upon completion of the construction. A construction loan will usually be interest only over the first 12 months and then revert to a standard principal and interest loan.
Once a construction loan has been approved and the construction of the property is underway, lenders will make progress payments throughout the stages of construction. Generally, the payments will be made at upon completion of five stages:
As the loan is being progressively drawn down, interest and repayments are calculated based only on the funds used so far. For example, if by the third progressive payment, only $150,000 has been drawn down on a $300,000 loan, interest would only be charged on $150,000.
It is also important to note that most banks require you to use all of your equity before they release the next payment.
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