Everything you need to know about construction loans

Construction loans are not as straightforward as standard home loans. There are additional decisions to be made about the structure of the loan, additional documentation is required and the funding is released in an entirely different way.

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

Further documentation will also be required before the first payment is made from the lender to the builder, including a schedule of the payments to be made (called drawdowns/progress payments), the builders’ insurance details, and the final plans that have been approved by the local council.
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Structure
To avoid having to contribute your full deposit and being charged interest on the entire loan amount from the moment the land purchase settles, 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 – you may also be required to pay lenders mortgage insurance (LMI) depending on your deposit size.

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 the lender to make each payment to the builder, you will need to fill out a drawdown request form from your lender, and submit it to your builder. The builder can then send the lender your form with an invoice for that part of the payment and, after the lender is 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.

Any changes to the contract and plans can trigger a reassessment of the loan, so be as sure as you can that the plans and contracts the lender sees are final. It’s also worth trying to pay for any small amendments from your own pocket, rather than changing the loan and risking a reassessment.

Construction loans can be complex, but we're here to simplify the process for you. Let KLM finance guide you every step of the way. Contact us today to get personalised advice and start turning your dream home into a reality.