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What Is A Construction Loan And How Does It Work?

Building a home requires a significant amount of money, or even if you wish to renovate your home, the construction costs can reach high prices based on your needs. To cope with these costs, you might want to apply for a construction cost through a finance broker in Brisbane that can allow you to have a balanced financial situation. Read on to learn about a construction loan and how it works. 

What Is A Construction Loan?

A construction loan refers to a loan that allows you to borrow money for building a property or engaging in a significant renovation. With a construction loan, it becomes easy for the borrower to make payments for every build stage without arranging all the funds upfront. You can either apply for the loan for building or renovation of your home, or you can apply for the loan to support similar projects for a commercial building through a business finance broker in Brisbane. The key benefit of getting a construction loan is that you only have to pay interest on the amount you spent on the construction, not the amount you borrowed. 

How Do Construction Loans Work?

Construction loans are unlike traditional loans, where you borrow the whole amount sanctioned from the lender upfront. With a construction loan, you only draw money based on each stage of the construction to make payments, which means that you draw an amount for payments as the construction progresses.

Let’s understand this with an example to understand the workings of a construction loan clearly. Suppose you applied for a loan that sums up to $800k but only utilised $150k from the sanctioned amount based on your needs. So, the interest amount will only be applied to the actual amount used rather than the amount you were approved for. However, you also need to know that you are not paying any principal amount during this time.

Just like every other loan, you would also have to pay a deposit for this loan. The LVR offered to you by the lender will be within their usual range, and if the LVR exceeds 80%, you will also have to pay LMI.

What Is The Process Of Drawing Down Payments Based On Construction Progress?

With every construction phase of your building passing by, your builder or trader will send you an invoice. You will then send this invoice to the bank, and they will give you the funds for the work completed. 

As soon as the construction is complete and the builder receives their final payment, you will shift from paying only interest to delivering both the principal amount and interest. Progress down payments are usually divided into five or six stages based on the different stages of the construction. 

  1. Deposit for the builders to begin the construction.
  2. Foundation.
  3. Framework, brickwork, roofing and installation.
  4. Lock-up.
  5. Fit-out.
  6. Completion.

Can Owner Builders Apply For A Construction Loan?

Yes, an owner-builder can apply for a construction loan. However, it is not available at all places, and it will only be approved if you can show that you have the required ability and skills to complete the project. If you don’t have a builder’s licence and cannot show your skills to complete the build, the lender might lend you a limited amount of money or decline your loan application. Being an owner of before r, you will be required to have a significant amount of equity or deposit to be eligible to apply for a construction loan provided by a finance broker in Brisbane

Suppose you don’t have any experience or skill associated with construction. In that case, hiring a professional to ensure the project is completed with quality work and no compromise is better. 

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