How the Building Loan Works
You need to be aware of the need to stay within your budget and that building often takes longer (and costs more) to complete than you initially expect. It is important to factor in the cost of rent while paying interest on your construction loan – this alone can cause some stress, particularly if you experience any delays in the completion date.
When borrowing to buy a section and build a house, your deposit will be used for the section purchase, and the remaining funds needed will be determined by a registered valuation of the building plans.
The bank will generally lend 75-80% of the projected end value of your house and section, as confirmed in the registered valuation. The loan funds will be released in progress payments during different stages of completion. Your build contract will contain a payment schedule, which sets out when progress payments will be made under the terms of the contract.
For example, the first progress payment is usually made once foundations and floorings are in place, the second when the roof, external cladding, doors and windows are in place (referred to as ‘lock-up’ stage) and the final payment is made once the internal fit-out is complete, e.g. carpets, electrical etc.
A revolving credit home loan can be a good option for a building project. Also known as a “flexi” loan, it is much like an overdraft, which allows you to draw down funds as and when you need them. You only pay interest on what you have drawn down at any time, which provides ideal flexibility in this situation. Once you have drawn down all funds and completed your house project, I can help you decide on your final loan structure.