What is a construction loan and how does it work?

A construction loan is the finance your institution gives you to pay for the building of your new home. This is the money that is paid to your builders. In reality, this is separate to the loan for your land, because you need to pay for the land before construction on your home can commence.

Regardless of whether you are investing in a house and land package in Brisbane, the Sunshine Coast or Perth, when you first apply to a bank or other financial institution for a home loan, you will need have a list of documents ready to prove to the bank that you can pay off the requested loan.

What documents do you need to provide to the Bank?

The documents you will need to show when you apply for a loan depend on the type of borrower you are and the type of loan you need. For example, a self-employed first home buyer will need to gather together a slightly different set of documents than would an investor or a refinancer.

So for the average Australian family on a salary (not self-employed), you will need the following documents:

  • Two most recent consecutive pay slips.
  • Most recent group certificate.
  • Identification documents equivalent to 100 points.

Self-employed borrowers for house and land packages in Queensland and Perth need to show:

  • Last two years personal and business tax returns and ATO assessments.
  • Identification documents equivalent to 100 points.

If you are refinancing you’ll also need to show:

  • Statements for the last six months of any existing home loans or personal loans.
  • Your most recent rates notice and building insurance policy on the property to be offered as security.
  • Credit card statements for the last six months if the card is being refinanced, as well or just your most recent credit card statement if card is NOT
    being refinanced.

If you are buying somewhere new you will need to show:

  • Bank statements for the last six months to show your savings history.
  • Evidence of term deposits, shares and other investments (statements, certificates, etc.)
  • Statements for the last six months for existing home loans and personal loans.
  • Your most recent credit card statement.
  • A copy of the sale contract for the property being purchased.

If you are an investor and purchasing house and land in Queensland or West Australia, you will also need to show:

  • Evidence of the investment property income, such as a copy of the lease, rent appraisal or rent receipts.
  • A rates notice for each property you currently own.

If you are building a new home you will also need to show:

  • A copy of the builder’s fixed price tender (including all specifications).
  • A copy of council approved plans to finalise your construction finance.

Once you have your home loan, the funds available for construction will be drawn down via staged progress payments, which will be paid directly to your
Queensland or Western Australia builders. This way you are only charged interest on the funds used, reducing the interest charged.

You will be required to obtain an “Authority to Commence” letter from your lender and give it to your builder before construction commences.

In the initial stages of construction, you will first be required to contribute your own funds towards the construction cost (unless the total cost of
construction is funded by your lender). The funds provided by your home loan will then be used to complete the project.

Note, if you are eligible for the First Home Owner Grant, the grant is only accessible once the slab has been completed.

What documents do you need to provide before progress payments can be made?

Once you’re ready to start building, you need to provide your lender with the following documents. This will help ensure there is no delay when processing
your first progress payment to your Perth, Brisbane or Sunshine Coast builders.

  • Copy of your Builder’s insurance policy.
  • Copy of your Builder’s licence.
  • Copy of your executed Fixed Price HIA/MBA Building Contract, which must include all components of construction.
  • Copy of Council approved plans and specifications.
  • Authority to commence letter.

What steps do you need to take to request a progress payment?

Before your lender can make a payment to your builders, you must provide them with the following:

  • Confirmation that your cash contribution towards the construction costs have been utilised (if applicable).
  • An invoice from your builder, which must be authorised and signed by all borrowers.

(Invoices will be issued by the builder once works for the stage have been completed in accordance with your build contract.)

Progress payments will be made directly to your builder, once you have contributed your funds (if any) to the cost of construction. Payments can take up to 5 business days to process, so always allow more time for progress payments to be made if an inspection is required.

What do you need to do prior to the final payment being made?

Once construction of your new home is complete, you will need to provide your lender with a copy of your Council Occupancy Certificate or equivalent (form 21) and your own home building insurance. Once your lender has a copy of these documents, they will arrange a final inspection along with the final payment to your builder.

Buying your own home can be confusing but if you take it step by step and make sure to have all this information completed and ready to go it will make the process much easier.

To find out more about our house and land packages call us on 1300 904 040 or contact us here.

 

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