As a property investor, you've probably considered the potential of new build or major home renovations projects. Construction loans can be an excellent vehicle to help you achieve these goals, but understanding the approval process is crucial for success.
What Makes Construction Loans Different
Unlike traditional home loans, construction loans operate on a progressive drawdown system. This means you only charge interest on the amount drawn down at various stages of the project, rather than the full loan amount from day one. This structure can provide significant savings during the building phase.
Construction loans typically offer:
• Interest-only repayment options during construction
• Progressive payments to registered builders and sub-contractors
• Flexibility to pay plumbers, electricians, and other tradespeople as work progresses
• Access to construction loan options from banks and lenders across Australia
The Approval Process Explained
When applying for a loan, lenders will assess several key factors that differ from standard mortgage applications. Understanding these requirements can help streamline your application process.
Documentation Requirements
Lenders will require comprehensive documentation including:
• Council plans and permits
• Fixed price contracts with registered builders
• Progressive Payment Schedule outlining payment milestones
• Development application approvals
• Detailed costings for materials and labour
Valuation Considerations
Lenders typically conduct an 'as if complete' valuation, assessing what the property will be worth once construction finishes. This valuation directly impacts your loan amount and the interest rate you'll receive.
Common Approval Mistakes to Avoid
Inadequate Planning
Many property investors rush into applications without proper preparation. Before approaching lenders, make a plan that includes:
• Identifying your ideal location and suitable land
• Understanding council restrictions and council regulations
• Determining whether you'll demolish existing property or pursue a new build
• Establishing a realistic price range and timeline
Overlooking Contract Details
Ensure your building contract clearly outlines what's included and what constitutes 'Out of Contract Items not included' in the base price. Additional payments for variations can impact your loan requirements and approval conditions.
Timeline Mismanagement
Most lenders require you to commence building within a set period from the Disclosure Date. Failing to meet this requirement can result in loan cancellation or renegotiation under potentially less favourable terms.
Understanding Progressive Payments
Construction loans operate through progressive payments tied to specific construction milestones. Your lender will release funds in instalments as each stage completes, typically including:
- Foundation and slab completion
- Frame and roof completion
- Brick and tile completion
- Fixing stage completion
- Practical completion
This system protects both you and the lender, ensuring funds are only released when work reaches agreed standards.
Fees and Charges to Consider
Beyond the standard loan establishment costs, construction loans often include a Progressive Drawing Fee for each payment release. Factor these costs into your overall project budget to avoid surprises during the building process.
Renovation vs New Construction
Whether you're considering major home renovations or new construction, different loan structures may apply. Some lenders treat renovation projects differently from new builds, particularly when existing properties provide additional security.
For house & land packages or buying off the plan arrangements, specific loan products may offer more suitable terms than standard construction financing.
Working with Finance & Mortgage Brokers
A Finance & Mortgage Broker can provide valuable assistance throughout the construction loan process. Experienced renovation Mortgage Brokers understand the nuances of different lender requirements and can help match your project with suitable financing options.
Brokers can also assist with:
• Comparing interest rates across multiple lenders
• Understanding specific lender requirements and restrictions
• Managing the application timeline to meet construction deadlines
• Structuring loans to optimise your investment outcomes
Alternative Options
Depending on your project scope, a home improvement loan might provide a more suitable alternative to full construction financing. These products often feature simpler approval processes for smaller renovation projects.
Construction loan approval requires careful planning, thorough documentation, and realistic timelines. By understanding lender requirements and avoiding common pitfalls, property investors can position themselves for successful approval and project completion.
At Premium Finance Group Australia, our experienced Finance & Mortgage Brokers understand the complexities of construction financing and can guide you through the approval process. Call one of our team or book an appointment at a time that works for you.
