A Complete Guide to Construction Loan Features

Building your dream home in Morningside is an exciting journey, and understanding construction loan features can help you make informed decisions throughout the process. Unlike traditional home loans, construction loans work differently and offer unique features designed specifically for building projects.

What Makes Construction Loans Different?

Construction loans are specifically designed for new builds, major home renovations, and house & land packages. The key difference lies in how funds are released and interest is calculated. Instead of receiving the full loan amount upfront, you'll access funds through a Progressive Payment Schedule that aligns with various stages of the project.

This approach means you only charge interest on the amount drawn down, rather than the entire loan amount from day one. For many borrowers in Morningside, this can result in significant savings during the construction period.

Progressive Drawdown System

The progressive drawdown feature is central to how construction loans operate. Funds are released in instalments as your project reaches specific construction milestones:

• Foundation and slab completion
• Frame construction
• Roof installation
• Lock-up stage
• Fixing stage
• Practical completion

Each drawdown requires inspection and approval from your lender's valuer, ensuring your project progresses according to plan. This system protects both you and the lender while providing funds when you need to pay sub-contractors, plumbers, electricians, and your registered builder.

Interest Rate Structure and Repayment Options

During construction, most lenders offer interest-only repayment options, allowing you to manage cash flow more effectively. The interest rate typically applies only to funds already drawn down, not the total approved loan amount.

Once construction completes, your loan usually converts to a standard home loan with principal and interest repayments. Some lenders may charge a Progressive Drawing Fee for each drawdown, so it's important to factor these costs into your budget.

Application Process and Requirements

Applying for a loan through a streamlined application process involves several key documents:

1. Council plans and permits
2. Fixed price contracts with your builder
3. 'As if complete' valuation of the finished property
4. Detailed construction timeline
5. Evidence of suitable land ownership or purchase

Planning Your Construction Project

Before applying, you'll need to make a plan that covers several important aspects. Finding an ideal location in Morningside within your price range is just the beginning. You'll also need to consider:

• Council restrictions and regulations in your area
• Whether you plan to demolish existing property for a new build
• Development application requirements
• Timeline constraints, as you typically must commence building within a set period from the Disclosure Date

Understanding Loan Features and Limitations

Construction loans come with specific features that differ from standard mortgages. The loan amount is typically based on the completed value of your property rather than current land value. This 'as if complete' valuation approach allows you to borrow against your future home's worth.

However, it's important to understand that Out of Contract Items not included in your building contract may require additional payments or separate financing. This could include landscaping, driveways, or premium fixtures not covered in your standard build.

Choosing the Right Construction Loan

At LBK Lending, we can help you access Construction Loan options from banks and lenders across Australia. Different lenders offer varying features, interest rates, and fee structures. Some may be more suitable for buying off the plan, while others specialise in custom builds or major renovations.

Working with an experienced renovation Mortgage Broker ensures you understand all available options and choose the loan that matches your specific project needs and financial situation.

Managing Your Construction Timeline

Successful construction financing requires careful coordination between your builder, lender, and other professionals involved in your project. Regular communication helps ensure progress payments align with actual construction milestones and keeps your project on schedule.

Remember that construction loans are temporary financing solutions. Planning for the transition to permanent financing should be part of your overall strategy from the beginning.

Building in Morningside offers wonderful opportunities, but construction financing can seem complex. Understanding these key features helps you approach your project with confidence and clarity about how your funding will work throughout the construction process.

Call one of our team or book an appointment at a time that works for you to discuss your construction loan options and find the right solution for your building project.