Construction home loans are designed to finance the construction or major structural renovation of a property. These loans differ from standard home loans in that they release funds in stages as the construction progresses, rather than as a lump sum upfront.

Here's how construction home loans work and what borrowers need to know before applying.

1. Loan Approval and Building Contract: Borrowers begin by obtaining loan approval from a lender based on their financial situation and the estimated cost of the construction or renovation project. They also need a building contract with a licensed builder outlining the project's scope, timeline, and cost.

2. Progress Payments: Construction loans are disbursed in stages known as progress payments. These payments are typically based on milestones such as completion of the foundation, framing, roofing, fixings, and practical completion. The lender must receive a builder’s invoice before releasing each payment.

3. Interest-only Payments: During the construction phase, borrowers typically make interest-only payments on the amount drawn down from the loan. This allows them to manage their cash flow more effectively while the property is being built or renovated.

4. Conversion to Standard Home Loan: Once construction is complete, the loan may be converted to a standard home loan. This involves a final inspection to verify that the property meets building standards and obtaining a certificate of occupancy. The loan then transitions to principal and interest repayments based on the remaining loan balance.

Considerations for Borrowers:

1. Cost Overruns: Construction projects can encounter unexpected costs or delays, so borrowers should have contingency plans in place and a buffer in their budget.
2. Builder's Reputation: Choosing a reputable and experienced builder is crucial to ensure the project is completed on time and to a high standard, reducing the risk of complications with the loan.
3. Loan Terms and Features: With the help of a broker, borrowers should compare construction loan options from different lenders, considering factors such as interest rates (either fixed rate or variable), fees – including if there are any progress payment fees or construction fees applicable, repayment terms, and features like offset accounts or redraw facilities.

Construction home loans offer flexibility and tailored financing for building or renovating properties. By understanding how these loans work and carefully planning and managing the construction process, borrowers can turn their property dreams into reality.

Contact your Priority Home Loans broker to learn more about Construction Loans.