If you want to build a home or residential investment property in Australia, chances are you’ll need a construction home loan. Construction home loans can also be used for major renovations in some cases.
In this guide to construction home loans you’ll learn about:
Construction home loans are designed to fund the building of residential homes or investments. This is how they work:
Just like with a normal home loan it’s best to have a deposit equal to 20% of the build cost before applying. You may be approved with as little as 5% but you may have been charged extra fees such as LMI along with higher interest rates.
When applying for a construction loan lenders will need all the usual documentation required when taking out a normal home loan, including:
When you engage a builder they’ll provide a contract that includes:
This document gives lenders an idea of when you will be drawing down on the loan, and when the project will be completed.
This will also be provided by your builder or architect and will include all details of your home including layout, size, specifications, materials used and more.
Before your construction loan is formally approved your lender will need an estimate of the home’s value on completion by a registered valuer. To do this the valuer will need both the building contract and the building plans.
They will estimate the value of the home on completion and compare it to recent sale prices of comparable homes in the area. This is done to ensure you’re not overspending on your build, and that your home will be worth more than the loan amount when completed.
Construction home loan progress payments are usually made in five key stages of the build. Here’s a rough breakdown of the total cost and duration of each stage:
|Construction stage||Description||% of total cost||Rough duration|
Up to 30 days
Up to 30 days
Up to 60 days
Up to 60 days
The HomeBuilder scheme is a federal government initiative that awards a $25,000 tax-free grant for Australian citizens to build or substantially renovate their homes.
The grant must be used to build or renovate the recipient’s principal place of residence - it cannot be used for investment properties - Learn more about investment home loans.
Usually to secure a construction loan you’ll need to sign a contract with a qualified builder. If you want to build your home yourself, you’ll need to apply for an owner builder construction loan, offered by a select few lenders.
Getting approval can be difficult for this type of loan because lenders view owner-builder projects as more risky, and more prone to cost overruns. If you’re a licensed builder you may be able to secure a loan for up to 80% of the build’s cost - if you’re not you may only be able to borrow 50-70%.
Because lenders are so strict with these types of loans, before you apply you should make sure:
Since not all lenders offer these types of loans it may be better to speak to a mortgage broker or financial advisor to help find the right fit.
Construction home loans are loans specifically designed to fund the construction of residential homes and investments. Usually your lender will approve your loan up to a certain limit then allow you to draw down (withdraw) funds to cover building costs at each stage of construction.
To apply for a construction loan you’ll need:
Before your lender approves your construction loan a registered valuer will estimate the value of the home upon completion. Once your loan is approved you’re free to start construction!
Before you apply it’s a good idea to check if you’re eligible for the HomeBuilder scheme as you may be able to access a tax-free grant of up to $25,000.
A construction loan is a home loan specifically designed to fund the construction of residential homes and investments.
Most major banks and lenders offer construction loans including:
Banks may have slightly more stringent restrictions and credit policies when assessing construction loans because they are considered higher risk than regular home loans. That’s because lenders:
Construction loans typically have a variable rate that is higher than market rates for normal home loans.
To secure a construction loan you must have:
You’ll also need all the documents required to apply for a normal home loan including:
Money.com.au want to make managing money easy and fun! By giving Australians simple tools so they can make the best decisions they can about their money.
We understand that the world of finance is complex, and offer free, extensive guides on Personal Loans, Car Loans and Business Loans, along with tools like our Budget Planning Spreadsheet to help you better manage and understand personal finance.
Shaun is the founder of Money.com.au and is determined to help people pay as little as possible for financial products. Through education and building world class technology. Previously Shaun co-founded CarLoans.com.au and Lend.