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Financing Your Construction:
A Step by Step Guide
Embarking on a construction project in Australia is an exciting journey filled with possibilities, but it also comes with its unique set of financial challenges. Understanding how finance applications work around construction is key to successfully turning your dream home into a reality. In this comprehensive guide, we'll break down the process, drawing insights from experts in the field, to help you navigate the complexities of construction financing.
The Fundamentals of Construction Financing
Construction financing is a specialized type of loan that provides the necessary funds to build a new home or renovate an existing one. Unlike traditional home loans, where the funds are disbursed as a lump sum, construction loans follow a different disbursement model. These loans are typically structured to release funds in stages or 'progress draws' as the construction project advances.
The Application Process
Step 1: Determine Your Borrowing Capacity
Before diving into the construction loan application process, it's crucial to assess your financial situation. This involves evaluating your income, expenses, existing debts, and creditworthiness. Your borrowing capacity will determine the size of the loan you can secure.
Step 2: Choose the Right Lender
Selecting the right lender for your construction project is a critical decision. We work with a panel of over 30 lenders. We will carefully evaluate your financial position, compare lenders policies and offers that will meet your needs and priorities.
Step 3: Obtain a Pre-Approval
Getting pre-approval for your construction loan is an important initial step. Pre-approval provides you with a clear understanding of your budget and allows you to shop for a property or project within your means.
Step 4: Sign the Land and Build Contracts
Having a pre-approval in hand allows you to have a clear understanding of your budget and how you can allocate funds for the land, construction, and the selections stage.
The Construction Phase
Step 5: Loan Disbursement
Initially, you'll focus on making payments toward your land loan right after the settlement of your land occurs. Construction loans are unique in that they release funds in stages. These stages typically correspond to specific milestones in the construction process. For example, you may receive funds after completing the foundation or reaching the framing stage. Some lenders will conduct inspections at each milestone to ensure that the work has been completed satisfactorily before releasing funds.
Step 6: Interest-Only Payments
Throughout the construction phase, you typically make interest payments solely on the disbursed loan amount, which helps you manage your cash flow efficiently by paying interest only on the funds you've utilized. Your broker will provide you with detailed information about the specific terms and conditions of your construction loan.
Transition to the Permanent Loan
Step 7: Completion and Transition
Once construction is complete, your loan transitions into a permanent repayment. At this point, you'll begin making principal and interest payments on the entire loan amount (land + build).
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