If you’re considering building your own home then it’s important to have the right finance deal in place and to fully understand how home construction loans work.
The first thing to understand is that there are many different lending firms. To ensure you get the funds and the right deal for your construction needs it is important that you choose a reputable firm such as stornowaycp.com.au.
Funding Levels
The amount of funds you can borrow will depend on the value of your finished property and your ability to acquire a standard mortgage at the end of your build; assuming you’re planning to live n your home. You will need to have a good credit score and a detailed project plan.
It isn’t necessary to purchase the land first but you will need to have an idea where the land will be and you will need to detail exactly what type of property you are creating. This will allow the lending company to assess the value of the completed project.
In general a lender will loan up to 75% of the value of your construction; this is because lending on a property that has not yet been built is more risky than a conventional mortgage.
Your plans must have an estimated budget and a build schedule. This will confirm how long the project will take and how long you’ll need the funds from.
Releasing The Funds
Some lenders will include the cost of purchasing the land in the finance offer; others won’t. In either case you should have the funds to purchase the land and complete planning approval and professional drawings first. This is your down payment, initial investment and proof that you are genuine.
Most lenders will release the funds to you in three stages:
- Foundations
As you start building the foundations you’ll get the first release of funds; this will finance this section of the project allowing you to move forward at the expected pace.
- Main Structure
Only once the foundations are all completed will the funds be released to allow you to build the main structure of your home. This is where it will start to look like the pictures you’ve drawn.
- Internal
Finally, once the external structure is complete the funds will be released to allow you to complete the interior of your home.
It is important to note that if you run into unexpected problems you may need to find additional funds to deal with these; the lender will not release the next set of funds early.
Type Of Finance
There are two types of construction finance; you’ll need to decide which you want before you start the project.
The first is a temporary construction loan. You will be lent the funds to build the house but once it is completed you’ll need to get a traditional mortgage in order to pay the construction loan back. There will be a set time period in which you need to do this.
The alternative is a construction to permanent loan. This allows you to convert the loan into a traditional mortgage once you’ve finished the build. However, you may not be able to set the interest rate when you take out the construction loan.
