Your guide to construction loans
Last updated: 22 November 2024 | Estimated read time: 4 Minutes
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Who is a construction loans for? | How does it work? | When to apply? | How to apply?
Looking to build on a plot of land or renovate your property? A construction loan could be your key to turning those plans into reality.
When you buy a home that’s already built, you usually finance it with a home loan. But if you’re looking to build a new home or undertake major renovations, a construction loan might be the better option for you.
Is a construction loan right for me?
A construction loan is designed for people who want to build on a plot of land or substantially renovate their home. It’s structured a bit differently to a typical home loan, as it is tailored to the specific needs of financing a construction project.
A construction loan could be right for you if:
How do construction loans work?
Whether you’re building or renovating, you often don’t need all the money at once – unlike when you buy an existing home.
So, instead of getting your loan in one big payment/settlement, construction loans pay out in instalments – usually called progress payments or drawdowns. These align with the payments you need to make to your builder (or other contractors) for the work on your home.
When your builder invoices you for each stage of construction, you forward the invoice to your lender, who arranges for payment to be made directly to the supplier.
Most construction loans have five stages:
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1. Slab or base
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when the foundation is laid
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2. Frame
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when the frame is put up
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3. Lockup stage
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when external walls, doors and windows are installed
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4. Fit out stage
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when internal fittings and fixtures are complete
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5. Completion stage
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final touches and clean-up
While your home is under construction, you’ll typically make interest-only payments on the loan – but only on the amount you’ve drawn down. This can help you manage your cashflow, which is useful if you need to rent somewhere to live while your home is being built.
Construction loan interest rates are often higher than traditional loans. Once your build is finished, your loan will switch to a regular home loan with principal and interest repayments – depending on what you agreed on with your lender when you took out the loan.
When should I apply for a construction loan?
You should apply for a construction loan no more than 12 months before construction is due to start on your home. To apply, you’ll typically need a builder’s contract, council plans and permits and insurance in place.
How do I apply for a construction loan?
Just like any other loan, you’ll need to provide some documentation when you apply for a construction loan. This usually includes details of your income, any debts and your personal circumstances.
The good news is some lenders – like Pepper Money – offer more flexible construction loans. So, if you have a less-than-perfect credit history, work history or debts, we may be able to help.
As part of your application, you’ll need to provide:
- Council plans and permits.
- Your builder’s details.
- Insurance provisions, including builder’s insurance, home warranty insurance, and public liability insurance.
- A copy of your fixed-price contract including a progressive payment schedule.
- An ‘as if complete’ valuation showing the value of the land and finished building.
The construction home loan process at Pepper Money
We know building or renovating a home can be stressful, so we have a flexible and straightforward application process with fast approval in as little as two days.
Here’s how to apply for a construction loan with us
1. Get in touch
Speak to one of our lending specialists about your needs and circumstances.
2. Pre-approval
Give us some information and we’ll let you know whether we can pre-approve your loan. We’ll ask you to provide documents to verify your financial circumstances and building plans.
3. Unconditional approval
We’ll approve your loan once we’ve reviewed all your documentation and are happy with it.
4. Start receiving progress payments
As your builder completes each construction stage, your loan will be paid out in instalments.
5. Completion
Once all the work is complete, we will do a final inspection to make sure everything is finished to the right standard. After this, your loan will convert to a regular home loan.
Want to know more?
Learn more about our construction loans or get in touch with a loan specialist to discuss your needs today.
Contributor | Vasè Marcevska, Head of Direct Sales – Mortgages and Personal Loans
Vasè has over 16 years of experience in the Banking and Finance sector, specifically within the Third Party and Consumer lending industry. Her expertise now focuses on enhancing our Customer program through a deep understanding of mortgage origination and service excellence across our Financial products.
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