When it comes to constructing a new home you have a number of different considerations as compared to purchasing an existing home. The type of home loan you can take out is one example.
Construction loans are a specialised loan specifically for those building a new house. Listed below are answers to frequently asked questions about construction loans.
Can I keep my existing home while I have my new home constructed?
Bridging finance can make that possible, and being approved for that will depend on your ability to service the two home loans along with some other factors.
Bridging finance involves a temporary situation where you have a larger amount of debt during a transition from one thing to another. Usually that transition is moving from one home to another.
Given that you have a significant amount of equity in your existing home the biggest issue will be the serviceability during the time when you have both the old loan and the new loan. As there is a certain amount of uncertainty as to how long you will need to have both loans in place, you need to be able to make the payments on both of them indefinitely.
As an owner builder, can I get a construction loan?
In order to get a construction loan, you need to be a registered builder. This is because a registered builder should have insurance, so if they are unable to complete the construction due to illness, business failure or another reason, the insurance should cover a new builder coming in to complete the construction.
What happens if my builder doesn’t finish the job?
Every registered builder is required to have Residential Builders Warranty insurance. It covers damage or loss that has resulted from work not being completed, the loss of a deposit or a breach of statutory warranty. Such things could happen if the builder dies, disappears or becomes insolvent.
You should check with your builder as to the level of cover that he has because the legally required minimums may be less than what you have contracted for him to do.
These minimums may not be as big of an issue as what it might seem, in that progress payments are being made as the work is being done. Each time the builder gets the work to the completion of a stage then lender has a valuer inspect the property and verify that the work is complete to that point. Only then will the lender advance the next portion of money for the next stage of work. There will always then be a limit on how much can be lacking based on the value of the stage that the builder is at. So you should compare the minimums with the value of the largest stage between payments in your new home building or renovation project.
This whole process is designed to protect both you and your lender as much as possible during the construction of your new home.
Can I get a low interest rate on a construction loans?
Although construction loans are not always the cheapest home loans, there are still competitive interest rates available. Typically during the construction the interest rate will be slightly higher, but it then reduces when the work is complete. There will also be some additional costs during construction related to the stage valuations that have to take place. These costs are related to the additional work that must be done in checking on the progress and making the associated progress payments.
How are construction loans different than ordinary home loans?
The construction loan is unique in that the value of the property changes during the construction phase. With an ordinary loan the amount that you may borrow is limited to a percentage of the value of the property prior to the loan being in place. However, with a construction loan the final loan will be limited to the value of the property after the construction is completed. It’s designed such that the property should have adequate value at each stage of the construction process to cover the amount drawn at that time.
More information on construction loans
The best way to get more information that takes into account your own circumstances and needs is to give the friendly credit managers at State Custodians Mortgage Company a call on 13 72 62.