Avoid these Construction Loan Settlement mistakes

Understanding Construction Loan Settlement Fundamentals

Construction loan settlement differs significantly from traditional home loan settlements. Unlike standard mortgages where you receive the full loan amount upfront, construction loans operate on a progressive drawdown system. This means you only receive funds as construction milestones are reached, and you only charge interest on the amount drawn down at each stage.

When applying for a loan through OVM Finance Group, we can access Construction Loan options from banks and lenders across Australia. Our streamlined application process ensures Melbourne-based clients understand exactly how progressive payments work and what documentation is required at each stage.

Progressive Payment Schedule and Milestones

Construction loans typically release funds through instalments based on predetermined construction milestones. These progress payments are structured around key building phases such as:

• Foundation completion
• Frame erection
• Roof installation
• Lock-up stage
• Fixing stage
• Practical completion

Each milestone requires inspection and approval before funds are released. Your registered builder will coordinate with plumbers, electricians, and other trades to ensure work meets required standards. You'll need to pay sub-contractors only after receiving approval and fund release at each stage.

Essential Documentation for Settlement

Before commencing any construction loan settlement, ensure you have:

• Approved council plans and permits
• Fixed price contracts or house & land packages
• Progressive Payment Schedule agreed with your builder
• Development application approvals
• Suitable land ownership documents

Your lender will require an 'as if complete' valuation, which estimates your property's value upon completion. This valuation determines your total loan amount and helps establish appropriate progress payment amounts.

Interest Rate and Repayment Structures

Construction loans typically offer interest-only repayment options during the building phase. The interest rate applies only to funds already drawn down, not the full approved loan amount. This structure helps manage cash flow during construction when you might still be paying rent elsewhere.

Once construction completes, the loan usually converts to a standard home loan with principal and interest repayments. Some borrowers choose to refinance at completion to secure more favourable terms.

Common Settlement Mistakes to Avoid

Many Melbourne property owners encounter issues during construction loan settlement. Here are critical mistakes to avoid:

Inadequate Planning: Failing to make a plan for your ideal location and price range can lead to rushed decisions. Consider council restrictions and council regulations before purchasing land.

Incomplete Contracts: Ensure your building contract clearly defines what's included and excludes Out of Contract Items not included in the base price. Additional payments for variations can strain budgets.

Timeline Mismanagement: Most construction loans require you to commence building within a set period from the Disclosure Date. Delays can result in loan cancellation.

Insufficient Contingency: Whether undertaking major home renovations, a new build, or buying off the plan, always budget for unexpected costs.

Special Considerations for Melbourne Projects

Melbourne's unique planning environment requires particular attention to local council regulations. Whether you're planning to demolish existing property for a new build or undertaking major renovations, understanding local requirements prevents costly delays.

For clients considering investment loans for construction projects, additional tax and cash flow considerations apply. Our team understands Melbourne's property market nuances and can guide you through the process.

Managing Progressive Drawing Fees and Costs

Each drawdown typically incurs a Progressive Drawing Fee, usually ranging from $200 to $500 per inspection. Factor these costs into your overall budget alongside other loan establishment fees.

For major home renovations or smaller projects, consider whether a home improvement loan might be more appropriate than a full construction loan. Our mortgage brokers can assess which option suits your specific circumstances.

Settlement Timeline and Expectations

Construction loan settlements occur at various stages of the project, not just at completion. Initial settlement often happens at land purchase, with subsequent settlements at each milestone. This process can span 6-12 months depending on project complexity.

Understanding your borrowing capacity helps determine appropriate loan amounts and ensures you can service the debt throughout construction and beyond.

Working with experienced renovation mortgage broker services ensures you understand each stage of the settlement process. OVM Finance Group's Melbourne-based team provides guidance throughout your construction journey, from initial application through final settlement.

Call one of our team or book an appointment at a time that works for you to discuss your construction loan settlement requirements.