Building your dream home or undertaking major home renovations is an exciting journey, but securing the right loan can feel overwhelming. Construction loans work differently from standard home loans, and understanding these differences is crucial for your success.
What Are Construction Loans?
Construction loans are specialised financing solutions designed specifically for building projects. Unlike traditional mortgages where you receive the full loan amount upfront, construction loans operate on a progressive drawdown system. This means you are only charged interest on the amount drawn down at each stage of construction.
As a Finance & Mortgage Broker, G&T Finance can access Construction Loan options from banks and lenders across Australia, ensuring you get the right product for your specific needs.
How Progressive Drawdowns Work
Construction loans release funds in instalments based on your building's progress. Here's how it typically works:
• Initial deposit: Usually 5-10% of the total loan amount
• Progress payments: Released at various stages of the project
• Interest payments: You only pay interest on funds already drawn down
• Final payment: Released upon property completion
This Progressive Payment Schedule aligns with construction milestones, protecting both you and your lender throughout the building process.
Types of Construction Projects Covered
Construction loans can fund various building scenarios:
• New build: Building on suitable land you already own
• House & land packages: Combined purchase and construction
• Buying off the plan: Pre-construction apartment or house purchases
• Major home renovations: Significant structural improvements
• Demolish existing property: Knock down and rebuild projects
Each scenario has different requirements, and your Finance & Mortgage Broker can guide you through the specific criteria.
Key Requirements for Construction Loans
Lenders have specific criteria for construction loans:
- Council plans and permits: All necessary approvals must be in place
- Registered builder: Your builder must hold appropriate licences
- Fixed price contracts: Most lenders require fixed-price building contracts
- Development application: Approved before loan settlement
- 'As if complete' valuation: Property valuation based on finished project
Interest Rates and Loan Amounts
Construction loan interest rates are typically variable and may be slightly higher than standard home loans. The loan amount depends on:
• Your deposit amount
• The property's 'as if complete' valuation
• Your income and borrowing capacity
• The builder's reputation and experience
Many lenders offer interest-only repayment options during construction, switching to principal and interest once building completes.
Managing Construction Costs
Building costs can vary, so it's important to plan for:
• Out of Contract Items not included in your building contract
• Additional payments for upgrades or variations
• Progressive Drawing Fee charged by some lenders
• Sub-contractor payments for plumbers, electricians, and other trades
Your registered builder should provide detailed cost breakdowns and payment schedules before you start applying for a loan.
The Application Process
Applying for construction loans involves several steps:
- Make a plan: Define your ideal location, price range, and building requirements
- Secure suitable land: Ensure it meets council restrictions and regulations
- Choose your builder: Select a registered builder with appropriate experience
- Obtain approvals: Get council plans, permits, and development applications
- Submit your application: Work with your broker for a streamlined application process
Timeline Considerations
Construction loans come with specific timeframes:
• You must commence building within a set period from the Disclosure Date
• Construction typically must complete within 12-24 months
• Regular inspections occur at various stages of the project
• Delays can affect your loan terms and interest rate
Planning your timeline carefully helps avoid complications and additional costs.
Perth-Specific Considerations
Building in Perth and Western Australia has unique factors:
• Local council regulations vary between Perth suburbs
• Building codes specific to WA climate conditions
• State-based licensing requirements for builders
• Regional variations in construction costs and timelines
As local specialists, G&T Finance understands these Perth-specific requirements and can connect you with appropriate lenders.
Alternative Funding Options
Depending on your project, you might consider:
• Home improvement loan: For smaller renovation projects
• Personal loans: For minor upgrades or Out of Contract Items
• Line of credit: Flexible funding for ongoing projects
Your Finance & Mortgage Broker can assess which option suits your specific circumstances and budget.
Building your dream home or completing major renovations requires careful financial planning. Construction loans provide the flexibility and structure needed for successful building projects, but choosing the right product and lender is crucial.
Working with experienced professionals ensures your construction loan aligns with your building timeline, budget, and long-term financial goals. From initial planning through to final completion, the right support makes your building journey smoother and more manageable.
Call one of our team or book an appointment at a time that works for you. Let G&T Finance help you secure the right construction loan for your building project, whether you're in Perth or anywhere across Australia.
