Construction loans offer unique features designed specifically for building projects, whether you're undertaking major home renovations, buying off the plan, or starting a new build from scratch. Understanding these features is crucial when applying for a loan that matches your construction timeline and budget requirements.
Progressive Drawdown System
Unlike traditional home loans, construction loans operate on a progressive drawdown system. This means you only draw funds as needed throughout various stages of the project, and importantly, you only charge interest on the amount drawn down rather than the full loan amount. This feature can result in significant interest savings during the construction period.
The progressive drawdown aligns with your construction milestones:
• Land purchase or deposit
• Slab and foundation work
• Frame construction
• Roof and wall completion
• Internal fit-out and final inspection
Each drawdown requires progress payments to be verified before funds are released to pay sub-contractors, including plumbers, electricians, and your registered builder.
Interest-Only Repayment Options
During the construction phase, most lenders offer interest-only repayment options. This means you'll make smaller monthly instalments based only on the interest accrued on funds already drawn, rather than principal and interest repayments on the full loan amount. This feature provides cash flow relief while your property isn't generating rental income or you're managing dual accommodation costs.
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'As If Complete' Valuation Method
Lenders use an 'as if complete' valuation to determine your loan amount. This valuation assesses the property's worth once construction is finished, not its current state. This approach enables you to access Construction Loan options from banks and lenders across Australia based on the completed project's value, potentially allowing higher borrowing capacity for your build.
Progressive Payment Schedule Requirements
Most construction loans require a detailed Progressive Payment Schedule aligned with your building contract. This schedule must match construction milestones and include:
• Specific amounts for each construction stage
• Timeframes for completion
• Documentation requirements for each drawdown
• Allowances for additional payments if needed
Your construction loan will typically exclude Out of Contract Items not included in the fixed price contracts, so factor these costs into your planning.
Streamlined Application Process
Construction loans feature a streamlined application process that considers multiple project elements simultaneously. Lenders evaluate:
• Council plans and permits
• Building contracts and specifications
• Your financial capacity and borrowing capacity
• Suitable land requirements and council regulations
• Development application approvals where required
This comprehensive assessment ensures your project meets both lending criteria and council restrictions from the outset.
Timeline and Commencement Requirements
Construction loans include specific timing requirements. You must typically commence building within a set period from the Disclosure Date, usually 6-12 months. This feature protects both you and the lender by ensuring projects proceed within reasonable timeframes and interest rate conditions remain relevant.
Fee Structure Considerations
Construction loans include a Progressive Drawing Fee for each drawdown, typically ranging from $300-$500 per draw. While this adds to project costs, it covers the lender's additional administration and inspection requirements throughout the construction process.
Suitable for Various Project Types
Construction loan features accommodate different project types:
• House & land packages
• Knock-down rebuilds where you demolish existing property
• Major renovations and extensions
• Investment property construction
• Custom builds in your ideal location
When you make a plan for your construction project, consider your price range and specific requirements. Whether you're a first-time builder or experienced developer, understanding these features helps you select appropriate financing.
As an experienced renovation Mortgage Broker, OVM Finance Group helps Melbourne clients access construction funding that aligns with their project timelines and budgets. We work with multiple lenders to find construction loan features that suit your specific building requirements and financial situation.
Construction loans provide flexible financing solutions for building projects, but their unique features require careful consideration and professional guidance. Understanding progressive drawdowns, interest calculations, and timing requirements helps ensure your project stays on budget and schedule.
Call one of our team or book an appointment at a time that works for you to discuss your construction loan requirements and access the right financing for your Melbourne building project.