Buying Land & Building A House

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Documentation

In addition to documentation about your finances, income and identity, your application for a construction loan needs to include the fixed price building contracts or tenders for the construction, as well as the building plans & specs so that a valuation can be performed.

Further documentation will also be required before the lender issues the commencement letter.  This includes the signed fixed price building contract showing the progress payment schedule  (called drawdowns), the builders’ insurance, contract works insurance and the final plans that have been approved by the local council.

Structure

With most lenders, you can split your mortgage into a land loan and a construction loan. At settlement of the land purchase, you start being charged interest and making repayments on the balance of the land loan. The interest and repayments on the construction portion then kick in only as each drawdown is processed.

Funding

The drawdown schedule is very important, as you don’t start paying interest on each portion of the loan until it is paid to the builder – you, the lender and the builder need to be satisfied with the schedule.

For each stage completed, the builder issues you an invoice.  You will need to fill out a drawdown request form provided by your lender. The form together with the invoice is submitted by your mortgage broker to your lender.  For the lender to make each payment to the builder, the lender must be satisfied that the work has been completed and is up to the standard expected in the valuation.  The drawdown can be completed with a payment to the builder.

Below is a sample of a progress payment schedule.  Payment is required in five stages and these five progress payments total 100%:

  1. Slab including deposit – 15%
  2. Frame – 15%
  3. Lock up – 35%
  4. Fix – 25%
  5. Completion – 10%

Note that the first home owners grant is released during the first progress payment.

What you need to know about construction loans?

  1. Building/construction loans require progressive payments
  2. During construction period, customers are required to cover the interest accrued on their loans.
  3. Building/construction loans will convert to principal & interest once fully funded
  4. The building/renovation must be constructed under a signed contract by a licensed builder
  5. It is the borrower’s responsibility to enter into a satisfactory building contract and obtain legal advice

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