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How do construction loans work?

There is something very special about moving into a newly built home or putting the finishing touches on a major renovation. Maybe it is the look and feel of new paint and fresh flooring, or just knowing you have kicked a worthwhile goal. 

Whatever the motivation, plenty of Australians are rolling up their sleeves, with the value of building approvals jumping 14.7% from December 2023 to January 2024. Meanwhile, on the renovation front, we are not just pimping our pads for looks and lifestyle. Almost half the home renovations carried out in 2023 were designed with a ‘green’ focus to improve energy efficiency, according to Houzz Research. 

The upshot is that planning a new build or renovation can be exciting and rewarding. But long before you kick back and enjoy it, you may need to decide how to pay for it all. And a constriction loan could be the right tool for the job. 

How do construction loans work?

Construction loans work a bit differently from regular home loans. Instead of receiving a lump sum from the lender, which is usually the case with a traditional home loan, a construction loan drop feeds funds in line with various stages of the project. 

If you are building a new home, a lender will typically make progress payments across give main stages:

  1. Laying the slap
  2. Erecting the frame
  3. Reaching lock-up
  4. Fitting out the home, and 
  5. Completion of construction.

This arrangement can offer valuable advantages. 

For starters, paying out smaller sums during the construction period may provide a level of protection for the borrower against a building being paid for work that is not completed. In addition, while the project is underway, the loan interest is only calculated on the funds drawn down, not on the final total value of the loan. 

During the constriction period, you will generally be asked to make interest-only payments. This can be a lot kinder on your budget than principal plus interest payments, especially if you are renting while builders are at work. 

What to watch for with construction loans

Building projects do not last forever, and neither do construction loans. When your home or renovation is complete, your construction loan will typically roll into a regular home loan.  

It can all sound very simple, and usually it is.  However, a key challenge with construction loans is that they are not offered by every lender. 

It is important to speak to us at an early stage. We can help you identify lenders with construction loan options that meet your needs and budget, plus guide you through the application process. Our support can save you time and leave you free to focus on the project. 

If you are looking to build or renovate, talk to us about your funding options and we will aim to help you get the ball rolling on your construction project sooner. 

Phone: 1300 855 022

Zippy Financial is an award-winning mortgage brokerage specialising in home loans, property investment, commercial lending, and vehicle & asset finance. Whether you are looking to buy your first home, refinance or build your property investment portfolio, the team at Zippy Financial can help find and secure the right loan for you and your business.

About the Author:   

Louisa Sanghera is an award-winning mortgage broker and Director at Zippy Financial. Louisa founded Zippy Financial with the goal of helping clients grow their wealth through smart property and business financing. Louisa utilises her expert financial knowledge, vision for exceptional customer service and passion for property to help her clients achieve their lifestyle and financial goals. Louisa is an experienced speaker, financial commentator, mortgage broker industry representative and small business advocate.   

Connect with Louisa on Linkedin.   

Louisa Sanghera is a Credit Representative (437236) of Mortgage Specialists Pty Ltd (Australian Credit Licence No. 387025).

Disclaimer:This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. This article is not to be used in place of professional advice, whether business, health or financial. 

Comparison Rate calculated on a secured loan amount of $150,000 for a term of 25 years. WARNING: This Comparison Rate is true only for the example given and may not include all fees and charges. Different terms, fees and other loan amounts might result in a different Comparison Rate. Fees and Charges Apply. Terms and Conditions are available on request.