⛄12 Days of B&W Finance - Day 3⛄
It’s a new day, it’s a new dawn, it’s a new liiiiiiife... for those looking to get a construction loan!
What is a construction loan exactly and why do so many people opt for them? We’ll be going over this today as day 3 of our 12 days of Black and White Finance continues.
"On the third day of Christmas, Black and White Finance gave to me: Three construction loans,
- Two different rate options,
- And a head start on my first home"
Build em’ up, Break em’ down!
If you are looking to build on a bit of dirt, or turn your current property into your dream family home, then we can apply for a construction loan. Similarly, if you're wanting to develop that block of apartments, or build that duplex, or that row of townhouses, a construction loan is your go-to here.
Who’s Involved?
Construction loans can be complicated so it’s always in your best interest to have the right people on the job. If you’re thinking of building your own place there are a few key people you’ll need to help;
Conveyancer – A conveyancer will typically help review the contract of sale making sure there is nothing curly in the contract that is detrimental to the buyer, covering you from a legal perspective. This is if the property hasn't been already bought.
Contractors – Contractors are the tradesmen that keep the cogs turning in your new build. These could be anything from plumbers to electricians and are sometimes sub-contracted by the builders.
Builders – These are the people who will actually construct or manage the construction process for you, the bread and butter of any construction loan.
Lenders – The bank(s) who will fund the construction.
Quantity Surveyor – Quantity surveyors are specialists who estimate the value of construction costs as a whole. They assess contracts, estimate materials and labour costs, and even advise on legal and contractual issues (for bigger projects).
Accountants – Typically only for bigger commercial projects to help ensure the structures are most suitable.
The Council + Architect – The local council will need to approve building plans that your architect has helped you put together.
It just works!
Construction loans can be segmented into 5 stages, in a 'progress payment schedule' as is the more technical term. The stages are;
Foundation – Levelling the land and laying the foundation, otherwise known as laying the slab.
Frame & Brickwork – Roof and setting the insulation.
Lock Up – Setting up all the doors and windows.
Second Fix – This is where the plastering and sealing comes in.
Completion – Painting, appliance installation and fixtures are set in place.
Congratulations, you now have a fully-fledged property after this stage and can go on living the Australian dream. But before you get too cosy, how much is all this going to cost?
Money talks, builders walk!
So now comes the fun part, this is where we can work out if we can afford to get the kids that new PlayStation for Christmas or a lump of coal. This graph shows the percentage of the total costs of each stage of construction right up until completion (on a conservative level).
Beauty is in the eyes of… the bank?
So how does the bank see construction loans from their perspective?
Well, put simply construction loans can be a very time-consuming process and often carry more associated risks than a regular home loan. For this reason, not every lender will offer it.
And for the banks that do offer construction loans, what do they need to get me approved and how do we get started?
Most banks need your fixed price building contract from the builder selected. In this contract, will be the progress payment schedule in it. We then also need to provide the bank with the draft plans or council approved plans if available, the specifications such as tap fittings, door handles, and all those fixtures and then finally, any variations - like a pool. All of these bits and pieces then go to a valuer who will determine what your end property is worth and this is the value that the bank will use for your valuation and lending purposes.
Once the loan is approved, with contracts signed and returned, and the construction loan ready to draw on, the bank needs to assign a specialised team that will process the progress payments and makes sure your builder completes everything as per your agreement.
The bank will send regular progress payments to the builder at each stage of construction and you (with the brokers help) will be required to;
Sign/complete a drawdown request form
Send the completed form to the lender
The lender may need a valuation of the completed work
The lender then pays the builder within 5 business days
Although on the flip side, if the team is slow at processing payments, your builder might get annoyed and delay the construction until the problem is fixed – This is why it pays to have a trusted lender and builder with a proven track record on construction loans.
Final Thoughts
Construction loans can be quite tricky if it is your first time applying for one.
You can liken them to the toy houses the elves make on the assembly line in Santa’s workshop, each one adding that special something until it reaches the end as a finished product.
Talk to us at Black & White Finance, we’ll do all the running around for you to get you that finished product you’ve been dreaming about – and we aren’t talking about the toy!
Reach out to us today
0448 890 186
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We’re also keen to receive your questions and if you want to know of some other great terms or rates on offer at the moment, and would rather email, please send a note to peter@blackandwhitefinance.com.au
* Your full financial situation would need to be reviewed prior to any acceptance of any offer or product. Subject to lenders terms and conditions, fees and charges and eligibility criteria.