Construction Loan article

HomeBuilder Grant Update

The Federal Government’s HomeBuilder Grant to bolster the property market has seen significant increase in the application for construction loans.  Recently, The HomeBuilder Grant has been extended for new homes and renovations to 31 March 2021.

The current Grant value of $25,000 will be reduced grant to $15,000 effective from 1 January 2021 to 31 March.  But the deadline on the start of construction has been extended to six months effective on all contracts signed from 4 June 2020.

Grant application can be submitted up until 14 April 2021.

The Government has increased the property cap for NSW of $950,000 & Victoria to $850,000 on signed contracts between 1 January 2021 to 31 March 2021. Although the property caps for Queensland, Northern Territory, Western Australia, Australian Capital Territory, South Australia and Tasmania will remain at $750,00.

All builders must have a valid licence and registration prior to 4 June 2020.

To find out more about the HomeBuilder Grant see https://treasury.gov.au/coronavirus/homebuilder

 Residential Construction Loans OverviewWhat does a residential construction Loan involve?

A residential construction loan is any value-added loan where the proceeds are used to finance construction of a residence for either owner-occupied purposes or investment purposes.  It can also be used for major renovations which involve structural improvements to an existing home.

Most lenders will lend up to 95% including lenders mortgage insurance, so you will need to contribute a minimum of 5% of the total of the land and building valuation plus any additional funds required to complete the transaction.

Also, all lenders will require a minimum amount of landscaping to be included in the contract including driveways, fencing and turf.

How does a construction loan work?

With a home construction loan, the lender considers the total amount required to pay the builder to complete construction. This amount is then broken down into ‘progress draws’.  These draws are paid to the builder at various stages during the construction process and once all have been made will make up the total of your loan.

Understanding the Construction Loan Process

Step 1: Like any other home loan, you will need to provide us with evidence of your income, expenses, assets and liabilities, together with additional documents that relate to your proposed build.

If you are purchasing a house and land package, then you will provide us with two contracts

  1. A contract to purchase the land which will make up a separate loan and can be fixed or variable and will be principal & interest repayments, and
  2. A Fixed Builders Contract for the construction of the home which will make up the construction loan. With most lenders this loan is normally variable and interest only until construction is complete at which time it will convert to principal and interest repayments.

If you already own the land then you will only need to provide us with the Fixed Builders Contract as advised above.

Step 2 –  All documentation and your application form is submitted to a lender. Some Grants are also available.

These include:

  • The HomeBuilder Grant
    • As per above
    • Apply through the Office of State Revenue in your state
  • First Home Owners Grant
    • The Queensland First Home Owners’ Grant is a state government initiative to help first home owners to get their new first home sooner.
    • If your contract is dated 1 July 2018 or later, you can get the Queensland grant of $15,000 towards buying or building your new house, unit or townhouse (valued at less than $750,000). The grant is paid per new home; not to each of the applicants for the same home.
    • Other states have a similar grant
    • For full details for Queensland, visit the FHOG Site
  • First Home Loan Deposit Scheme
    • The First Home Loan Deposit Scheme (FHLDS) is an Australian Government initiative to support eligible first home buyers to build or purchase a new home sooner. The Scheme is administered by the National Housing Finance and Investment Corporation (NHFIC).
    • Usually first home buyers with less than a 20 per cent deposit need to pay lenders mortgage insurance. Under the Scheme, eligible first home buyers can purchase or build a new home with a deposit of as little as 5 per cent (lenders criteria apply). This is because NHFIC guarantees to a participating lender up to 15 percent of the value of the property purchased that is financed by an eligible first home buyer’s home loan
    • Applications are lodged directly with the lender
    • For full details of the grant and authorised lenders visit the FHLDS Site

Step 3 – Once your loan is approved, you are ready to start building.  Prior to the lender making any progress payments you will be required to use the funds you are contributing.  Unlike a normal home loan where the lender pays out all the funds up front, with construction loans, as stated above, the loan is paid out at various stages during the construction process.

Five Payment Stages You need to know

Stage 1 – Deposit Stage

Normally 5% of the total contract price is paid prior to the builder commencing any work including preparation of plans and obtaining council approvals.

Stage 2 – Base Stage 

Normally 10% of the total contract price and is paid once the slab has been laid.

Stage 3 – Frame Stage

Upon construction of the frames, normally 15% of the total contract price and is paid.

Stage 4 – Lockup/Enclosed Stage

This means that the house is completed with windows and doors, and thereby lockable so it cannot be entered.  At this point, normally 35% of the total contract price and is paid.

Stage 5 – Fixing Stage

The next stage involves the internal fit out of the home with appliances, kitchens, bathrooms, and flooring.  Another 25% of the total contract price is paid at this point.

Stage 6 – Practical Completion

When the build or renovation is completed, and the builder is ready to hand over the home, a  final payment of 10% is required.  At this point, you should receive the keys to your brand-new property or fully renovated home.

Factors to Consider

Funding –If you are contributing some of your own funds to the construction, you will need to make those contributions prior to the lender making any payments.

Inspections – Depending on the lender, inspections will be conducted at various stages during the process. A final inspection and valuation will be conducted prior to the final payment being made by the lender.

Before investing time and energy in searching for a new home and land, you would be wise to seek a home loan pre-approval.  At this point, our experienced Mortgage Broking team can calculate how much you can afford to spend on building or renovating a home.  Or help you to restructure your finances and start you on the right path.  You can then talk to builders and agents with confidence that your construction loan will be approved. Contact our team today to start your property dream here

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