Building a home вЂ“ or undertaking a major structural renovation project вЂ“ can challenge even the best-laid plans. But ourВ construction loansВ (also known as building loans) take a lot of stress out of the equation. LetвЂ™s look at how they work.
You knowВ what construction loans areВ and how they can help you navigate cashflow challenges of big projects; it’s time to understand progressive drawdown. By allowing you to draw on your construction loan bit by bit as needed вЂ“ known as вЂprogressive drawdownвЂ™ вЂ“ your interest payments are lower than if you borrowed the whole amount upfront. A progressive drawdown вЂ“ or progress payment вЂ“ is the portion of your loan funds we release at each stage of construction.
If youвЂ™re using a registered builder, weвЂ™ll pay them direct at each stage of the build (assuming youвЂ™ve met our requirements). Among other things, weвЂ™ll need to see the builderвЂ™s invoices as well as a progress claim certificate.
If youвЂ™re an owner-builder, weвЂ™ll release the funds to you when we get itemised invoices and receipts вЂ“ and provided you meet our other requirements. WeвЂ™ll need these at each completed building stage. Importantly, they must match up with progressive payment schedule we agreed to when we approved the loan.
Our construction loans are designed to ensure you donвЂ™t draw more than you need вЂ“ or exceed the construction costs youвЂ™ve budgeted for.
ThatвЂ™s why ourВ loansВ begin with an interest-only period. This means youвЂ™ll be paying interest-only вЂ“ and only on the amount youвЂ™ve drawn down.
So whatвЂ™s the difference? LetвЂ™s look at two $500,000 loans вЂ“ one standard, one construction вЂ“ to see how it works.
If you have a standard home loan вЂ“ without building conditions вЂ“ you must draw down the total loan by a certain time. The full $500,000. That means youвЂ™re paying interest on the whole loan amount вЂ“ all $500,000 вЂ“ from the start.
But if you have a construction loan for $500,000, then you draw down what you need in instalments, to cover the costs of each part of the project. If your first invoice from the builder is for, say, $50,000, then thatвЂ™s what you draw down. ThatвЂ™s what you pay interest on. You only pay interest on the rest when you draw it down later in the project.
One more thing. We need the paperwork in order (all invoices etc.) before we release each progress payment. Our brochureВ Your Guide to Building and Renovating (PDF, 265KB) , opens in new window В has more information.
Before you start building, weвЂ™ll need an вЂas if completeвЂ™ valuation вЂ“ an estimate of the market value of the land and proposed building/renovation.
Cost overruns are when the building expenses exceed the planned progressive payments we agreed to at the start of your loan. We understand this sometimes happens. You might change your cladding from timber to brick. You might opt for wooden joinery instead of aluminium. Or you might simply decide you want double powerpoints instead of single ones.
If you exceed the amount we agreed upon, talk to us ASAP about next steps. If we canвЂ™t provide additional funding, youвЂ™ll need to cover the extra cost yourself.
Once your work is done, weвЂ™ll need some last bits of paperwork before we release the final portion of money. Our brochureВ Your Guide to Building and RenovatingВ (PDF, 265KB) , opens in new window В has the details.
Once the interest-only period of your loan ends, your loan becomes principal and interest. If you finish building before then, you can change the loan over to principal and interest. YouвЂ™ll need to contact us to do that.