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Construction loans explained...

What is a Construction Loan?

The financial requirements of constructing a new home can be rather different from purchasing an existing property. To meet the needs of this area of the home loan market many lenders offer what is known as a construction or building loan.

With a construction loan, you can break up the drawdown of the loan amount into five progressive draws which parallel the construction phases - slab down and complete, frame work complete, external brick work complete, lock up stage and final completion. As one phase of the construction is complete, you are able to draw down the next portion of the loan.

This means that interest is only calculated on that amount which has been physically drawn down, and you are only making repayments on the portion you have used.

Advantages

  1. Construction loans allows interest only payments for the land portion prior to construction and interest only payments during the construction process
  2. The funds will be paid to you in drawdowns ensuring you only pay interest on the portion of the construction loan you have drawn down
  3. Upon completion of construction, your construction loan will automatically revert to a standard variable rate home loan
  4. Construction loans are available for both registered builders and owner-builders
  5. You have up to 24 months to complete construction after settlement of land
  6. The total construction loan may be split between two accounts after construction is complete to identify personal and investment debt made.

Possible Disadvantages

  1. Owner-builders are allowed a maximum 50% Loan to Value Ratio (LVR)
  2. Funds are released at predetermined stages after proof of work has been established
  3. Council approved plans and a fixed price tender is required at time of the Construction loan application.
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