Advantages of construction loans
Saves Interest :
It helps you save interest because interest is applicable only on the amount drawdown, not on the maximum amount which bank or lender has agreed to pay. So, you pay less interest rate.
Lower Repayments :
During the construction period, loan repayments are interest only which means that you only need to pay interest only for the amount drawdown until the construction is complete. Therefore, loan repayments are lower.
Opposed to other loans where borrowers can only borrow money against the value of current land or property, construction loan allows borrowers to borrow money against the value of the property as if it were completed.
Payments will not be made to the builder until the builder’s work is inspected and approved by the borrower.
How construction loans in melbourne work
Construction loans are suitable for any borrower intending to build a new home on a vacant block of land. Here are the steps that you need to follow
Choose the best offer among various construction loan lenders in Melbourne as the interest rate may vary greatly from regular home loans.
Make sure you have gone through the copy of your credit history before applying for a construction loan. A good credit record can increase your chances of getting a construction loan. Also, make sure that you are in a good financial position before applying for a construction loan.
Construction loans take place in 5 stages and these are:
- Frame and Brickwork
- Lock Up
- Second Fix
- You will be asked to present an estimation and specification of your construction plan to the lender before the loan process
You can either deposit the money to the lender or you can show your land on which house is to be built. This land will act as a security for the bank or lender.
The payment is distributed to the builder according to progress stages. An inspection will be held after each construction stages to ensure that work is satisfactorily done. Once it is ensured that the work has completed for a specific stage, payment will be made to the builder. This thing protects the lender as well as you, ensuring the work has been done.
You will be required to show an occupancy certificate issued by the local council before the approval of the final payment of the construction loan. Your lender will not provide you fund until you provide them with the occupancy certificate. Occupancy certificates make sure that your property is fit to be in a residential area.
Never forget to ask your builder for a risks insurance policy. This should be done to protect your lender and yourself from any unpredicted damage.
Construction loan application checklist
Passport, birth certificate, driving license and a copy of marriage certificate if married.
Recent salary slips from the employer with the name of the company. In case, you are self-employed, personal and business tax returns of last two years, ATO assessments, and all income details will be required.
- Signed building contract between borrower and a credible builder
- Stamped document of building plans
- Rent income statements
- Copy of builder’s insurance policy
- Centrelink letter confirming family tax benefits
- Centrelink letter confirming permanent government pension
- Proof of shared dividends
- Evidence of any other regular income
- Proof of ability to make extra repayments