If you need to borrow money to build a new home or property or to make substantial renovations to your existing property, generally a construction loan would be a suitable choice, there are a couple of advantages of using a building loan to finance this type of project. The first one is due to the fact that the loan is drawn down in stages, unlike a normal home loan where the money is usually received in one lump sum at the start of the loan.
The gradual drawdown of the loan, referred to as progress payments, is usually paid to the builder directly. As the different building stages are completed the lender will release funds to the builder. Sometimes the lender may want to inspect the progress prior to the release of funds, but this will depend on the lender. The benefit of this is that you only pay interest on the amount of the construction loan actually drawn down, not on the entire amount of the loan applied for. You may also be able to pay interest only repayments or capitalise the interest during construction to increase your cashflow too.
Purchase the land first with a construction loan
A construction loan is flexible, in that you are able to use them to purchase a block of land initially and then when you are ready, be able to access funds required in order to build your property. They are suitable for both residential and commercial projects.
There are a couple of issues a bank will want to confirm when using a construction loan such as whether the builder you are using is licensed or not, insurances held by the builder and insurance cover of the project. Some lenders will also set a limit on the building loan period allowed and the location of the project can also impact on your access to funding.
So, if you have a construction loan project that you are considering or would like to find out more, please give us a call as we would love to chat with you about your plans.