Construction Loans

Construction Loans

How Does Construction Loan Work

Construction loan are used for any home improvements where structural changes are required or you are buying land and wish to build your desired home.

Construction Loans

Here are the key points to consider regarding construction loans:

  • Purpose: Construction loans are specifically designed to finance the construction or renovation of a property.
  • Phases: These loans typically have disbursement phases based on project milestones, such as completion of the foundation, framing, and finishing.
  • Interest: During the construction phase, borrowers typically only pay interest on the amount drawn, not the full loan amount.
  • Conversion: Once construction is complete, the loan may be converted into a traditional mortgage or paid off with a new loan.
  • Down Payment: Borrowers may need to make a down payment, often ranging from 20% to 25% of the project’s total cost

FAQ’s for Commercial Loan / Business Loan:

This loan is very popularly known as land and build loan. There are two types of land and build loans

Turn Key projects or Off Plan property:

In this case one usually purchases the property directly from the property developer subject to their due diligence . Once buyers are satisfied with their due diligence they have to pay 5-10% deposit on going unconditional and the remaining loan to be settled when the house built is completed and title & code of compliance are issued for the property. It is the purchaser’s responsibility to do correct due diligence with their solicitor and seek an approval from the Bank before they go unconditional on the contract. On these types of loans the repayment will only start after the settlement not from the time you go unconditional. Please note on these types of projects, Banks criteria are subject to change from time to time. It is advisable to approach a Mortgage Adviser who can walk through this journey with you and help you sort out the finance from the Bank.

Land and Build Projects:

In this type of scenario, you have loan approval in two parts. Part one is to purchase a land and settle on the Land first. Bank usually expects you to put your total deposit towards the land . You can fix the loan if you wish to the land portion. Part two is actual construction loan. This loan is usually done on a progress payment basis. There are certain conditions that need to be met to seek a construction loan.

The basic conditions are as follows:

  • Resource Consent
  • Building Consent
  • Plans for the build
  • Fixed price contract from the builder satisfactory to the
  • Bank Builder’s Risk Insurance
  • Registered valuation “As is and on Completion Value”

Other conditions may differ on case by case basis

  • If there are only cosmetic changes required in the property which does not include any structural changes, the bank will do a simple home loan top up subject to equity, affordability and lending criteria on a case by case basis.
  • If your property requires structural changes than conditions will be more or less similar to a construction loan

Usually, a property developer who wishes to build 3-4 properties on the same site they are classified under developer loans. They ideally prefer to deal with second-tier lenders. Requirements are similar to the land and build package. However, their interest rates and fees will be different from the main banks and they will also differ from lender to lender.

When one wishes to build a property or number of properties on vacant land the type of loan required is called a construction loan.

Based on different types of construction loans, one should wisely choose the right lender to suit their needs.

For construction loans, one should look at the bigger picture and consider the risks involved in the project.

Things to consider when choosing a lender for the construction loan:

  • What are the upfront fees?
  • How much is the broker fees?
  • What are the interest rates?
  • Are there any holding fees or line up fees? If yes how much?
  • Is QS report required in addition to fixed-price contracts and registered valuation?
  • What are the options for the term of the loan?
  • What will be the maximum LVR that the lender will let you go up to?
  • Will the interest be capitalised to the loan?

A construction loan is usually calculated based on the end value of the property once the build is completed.

If you are borrowing from the main Bank, they will ideally allow up to 80% of the land and build.

If you are a First Home Buyer and wish to proceed with the Land and Build the Bank may allow you to go up to 90% of the land and build cost.

If you are the owner of the existing property and wish to borrow for land and build you may be able to borrow a maximum up 85% of the total cost. However, it is at a Bank’s discretion. It is very difficult to give an estimated $ amount that one can afford for a construction loan as it is heavily reliant on loan to value ratio and servicing capacity both.

Key factors for the affordability of construction loans are:

  • How much deposit are you contributing upfront?
  • How will you manage the cash flow?
  • Total servicing capacity
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