A land loan or construction loan can help you get the property you want. With flexible structures allowing you to choose a land loan, construction loan, or combine both, you could save thousands over the course of your loan.
In this article, we’ll cover everything you need to know about land and construction loans, as well as how to find the best option for your needs.
What is a residential construction loan?
There are a number of different construction loan types offered by numerous lenders. Typically, a construction loan with a lender has 5 stages of drawdown during the build phase: Slab or Foundation, Frame/Brickwork, Lock Up, Fixing/Fixtures and lastly Practical Completion. A drawdown is the term a bank uses to settle an amount of funds. During these 5 drawdown stages, the bank releases a set amount of funds according to the progress building schedule provided by the builder. Each stage has a percentage of funds required to be provided to the builder, in which the bank will drawdown a portion of the loan to correspond with that progress payment. This will allow the builder to continue to construct and pay their trades to maintain a prompt build time. Delays in the payments can cause works to stop and delay your construction. This is the most common form of a construction loan and with most lenders you will normally be on an interest only repayment during this construction phase.
What is a Land Loan?
A land loan is a home loan where borrowers will seek financing to purchase vacant land that they intend on developing in the future. While home loans involve purchasing the land and home together, a land loan is specifically designed to help a buyer purchase land. It can, however, be combined with a construction loan and structured to make the process of purchasing land and building a home on it easier.
Why do you need a specific construction finance loan?
Whether you are looking to knockdown and build a new home or have recently purchased land to construct upon, it is important that you structure your finance correctly. At Borg Financial a large portion of our clientele are looking to build their dream home. There are various types of loan structures from different lenders which usually seems daunting at first glance, but with a mortgage broker we can safely and effectively navigate the options available and help select the right option for you.
When you are buying a residential land lot and would like to construct, there may be a difference in time before obtaining your HIA build contract from when you have signed the land contract. With this type of circumstance there may be a requirement to settle the land sooner and will require a two-part loan application. Settling the land first then the build second. After the construction 5 progress payments have drawn down, a consolidation of the two loans to put them together is a potential option.
Some lenders have a specific construction loan type, which differ significantly to the offers they show or advertise on TV, social media platforms, and radio. It is important to understand that the loan offering with even the major lenders can be quite limiting and selecting the wrong product could have consequences.
Benefits of using a broker for construction finance.
When you sign your land contract or build contract, there could be some time before settlement is required. During this time, a broker assisting you with your finance application can strategize the best way to have your loan setup correctly. Borg Financial understands that changes can occur during this time, and we accommodate our clients with solutions to those changes.
With more than 40 different banks on our panel, there is bound to be a lender that offers a loan solution better than another for your circumstance. In some cases, there may be a split loan setup required for the land portion and a split for the build portion. In other times there could be just one singular loan, and this can mean the difference of having a variable loan, fixed loan or both a fixed split variable loan. Ask us about our options for construction loans today.
Should I fix my loan if I am constructing?
We get this question a lot, fixed rates have been at an all time low, some under 2% which is astronomically low and understandable that you want to take advantage of how cheap. How can you take advantage of this low rate during your construction phase of your loan? Most lenders do NOT allow you to fix your loan during construction as there are a number of drawdowns to occur at different times which makes an ever changing fixed rate incredibly difficult. However, that is not to say you still cannot take advantage of this. The land component of your build which may or may not have debt on the security is a non-changing loan asset. This means in a split loan circumstance during construction you can fix your land loan and keep the construction portion variable until after the construction phase in which you can fix post construction.
What is a valuation shortfall?
When building a home, it is the builder that sets the price of the construction to which you will agree to pay. This is not all the time the actual value of what you are building. A valuer who is assigned usually by the lender will inspect the contracts of the land and house and look at something called “comparable sales” this is property that has sold in the area within the last 6 months. Including property for sale and property in neighboring suburbs. Should the suburb you are purchasing have a lower average price than the price of the contracts (house and land) combined then it is possible for the valuer to come back with a lower value for your property. This intern restricts the lending limit and can overall mean you will need to contribute the difference out of pocket or look at a different lender for another solution. Rest assured Borg Financial is well versed in shortfalls and has the ability to potentially assist in mitigating the negative outcome.
Additional requirements when building your home.
It is important to note that when constructing your dream home, there is more involved with the security during the construction phase. Whilst the builder themselves will have insurance to protect your home whilst the build it, you will require to also have building insurance before they can issue the occupancy certificate for you to move in. A mortgage broker understands this requirement very well, simply because the bank will not release the final payment until we provided them with a certificate of currency ensuring the property is insured. Whilst home contents are obligation free, building insurance is not and is a mandatory requirement for majority of lenders. Some lenders will require that the insured amount is more than the value of your home loan.
Why Not Simply Get a Home Loan?
While you could get a home loan to finance your land and construction costs, land and construction loans have a number of benefits that general home loans cannot provide. This includes being able to access your funds over time when you need them and pay less in interest over time, as opposed to paying interest on the full sum from the start. Interest rates and loan rates can vary depending on the type of loan as well. While there are usually timeframes set out for the drawdown and progressive payment of construction loans, this can be a useful way to ensure things are kept moving.
Ultimately, you need to work out what’s right for you, based on your unique situation. A construction loan broker will be able to help you make that decision and ensure you get the best possible results in the long run.
There are a number of services that require connection once your home is constructed aside from the obvious utilities, including internet, gas, water, electricity and solar At Borg Financial we have partnered with My Connect that can provide you with an array of connecting services needed before moving into your home. This includes even a moving van to assist with all the heavy lifting.
Learn More About Construction Loans With Borg Financial
Borg Financial can provide you with the information and support you need to get the best results when choosing a residential construction loan. We look at your financial situation or needs, your objectives, goals, and more to provide you with a comprehensive view into which construction loan will deliver the best results. Talk to an experienced loan broker today.