Did you know that construction loans work differently from standard home loans?
Construction loans can cover as much as 95% of a property’s completed worth, depending on your situation.
That’s a substantial amount for building your ideal home!
If you’re planning to build your dream home, understanding your borrowing capacity is crucial.
Unlike traditional mortgages, construction loans release funds in stages, meaning lenders assess your application differently.
Credit Hub’s team of expert construction brokers in Melbourne helps you explain the factors that influence how much you can borrow for a construction loan and provides you with the necessary information to get started.
What Are Construction Loans?
A construction loan is a type of finance for people building a new home on vacant land or tackling major renovations. Unlike regular home loans, where you get the full amount upfront, these loans release funds in stages as your build progresses.
This staged approach keeps cash flow in check and protects you and the lender by requiring inspections at each milestone. With support from a construction loan broker, understanding this process becomes straightforward.
How Do Construction Loans Work?
The process is structured around five key stages, with funds released as each phase is completed.
Here’s a breakdown:
| Stage | Description Approx | % of Funds |
|---|---|---|
| Foundation | Laying the concrete base | 15-20% |
| Frame and Brickwork | Building walls and basic structure | 20% |
| Lock Up | Adding roof, windows, and external doors | 20% |
| Second Fix | Installing internal fittings | 30% |
| Completion | Final details and occupancy certificate | 10% |
Inspections happen after each stage to confirm the work meets standards before the next payment is made.
Before the final funds are released, you’ll need an occupancy certificate from your local council, proving the home is liveable.
Key Factors That Determine How Much You Can Borrow
When it comes to calculating for a construction loan how much you can borrow, there are several important factors that lenders consider.
These include:
1. Your Income And Expenses
Lenders will assess your income against your living expenses. A steady income stream and the ability to manage your expenses effectively will increase your chances of borrowing a larger amount.
Your borrowing capacity is largely determined by your debt-to-income ratio, which compares your total income to your debts.
2. Credit Score
Your credit history plays a crucial role in determining your borrowing capacity. A higher credit score demonstrates that you are financially responsible, which may increase your chances of securing a larger loan. On the other hand, a poor credit history can lower the amount you can borrow.
3. Deposit Size
Typically, lenders will require a deposit of at least 20% of the total property value. A larger deposit can help reduce your Loan-to-Value Ratio (LVR), which means you may be able to borrow more.
However, if you have a smaller deposit, you may still be able to borrow up to 95% of the property’s value, but this will likely involve paying for Lenders Mortgage Insurance (LMI).
4. Value of the Land or Property
The estimated value of the land or property you plan to build on is another key factor. Lenders will typically finance a percentage of this value. The higher the land’s value, the more you may be able to borrow.
5. Existing Debt
If you have existing loans or debts, they will affect how much you can borrow for a construction loan. Lenders will consider your current financial obligations when determining your capacity to repay the new loan. The more existing debt you have, the less you may be able to borrow for your construction project.
6. Stage-by-Stage Loan Disbursement
Construction loans are disbursed in stages based on the progress of the build. The stages typically include foundation, frame, lock-up, second fix, and completion. As each stage is completed, an inspection is carried out, and the lender will release the necessary funds to your builder.
What Influences Your Loan Amount?
Several factors shape how much you can borrow. Stable income from a job or other sources reassures lenders you’ll repay. A strong credit score boosts approval odds, while high expenses or debts lower your capacity.
The property’s location and build quality affect its completed value, impacting the LVR. For house and land packages, the loan covers both, still based on the final value. A construction loan broker can pinpoint how these apply to you.
Tips To Maximise Your Loan
Looking to borrow more? Lock in a fixed-price contract so you won’t get any cost surprises that can affect valuations. Pay all debts on time to keep your credit clean. Show a steady income to demonstrate repayment capacity.
Most importantly, the budget should be realistic to cover all building costs, as variations can lead to re-valuation and, as a result, having sufficient borrowing capacity.
Before applying for your final drawdown and collecting your final payment from your builder, it’s a good idea to ensure your plans have been approved by the council.
Certainly, you’ll require council approval to collect your final payment from the bank. A mortgage broker will help you with all these factors, which will help improve your chances of a successful loan approval.
How Can Credit Hub Australia Secure Your Ideal Construction Loan Amount?
The value of working with Credit Hub Australia is significant when working out how much you can borrow for a construction loan. Our construction loan brokers will assess your borrowing capacity and connect you with the right lenders so you can maximise your potential borrowing – up to 95% LVR when possible.
Being based in Melbourne, our finance brokers are familiar with and knowledgeable about the area to guide you easily through staged payments, council approvals and documentation.
If you’re building a family home or looking to explore a property development loan in melbourne, Credit Hub’s mortgage brokers have accurate solutions to provide certainty in obtaining the funds to complete your project.
Disclaimer:
The information presented by staff or employees of Credit Hub and its associated companies is provided for general informational purposes only. We do not guarantee the accuracy, completeness, or timeliness of the data or views presented. Audience members should conduct their own research and verify any information before relying on it. Credit Hub and its associated companies are not liable for any errors or omissions, or for any actions taken based on the information presented.