Building a home? Find out how a construction loan works.

Unlike regular home loans, where a customer typically receives a lump sum of the loan amount at settlement, construction loans are delivered in progress payments at different stages of construction.

Construction loans are tailored to meet the unique needs of builders or renovators, helping the customer through the often complex process, and delivering finance in stages, as required. This approach means that the customer only makes interest repayments on the balance of the loan as it’s drawn down, rather than the entire loan amount, freeing up cash flow while the work is being carried out.

Construction loan payments

There are usually five stages of payment, which are  made at key points in the process – beginning with the ‘slab’ or floor, the roof and frame, the lock up stage, the fit out and finally the completion phase.

As each stage is completed, the customer is able to then draw down the next portion of the loan – which usually happens following an inspection by a valuer, who ensures that the requirements set out in the building contract have been met before authorising the next payment.

Depending on the loan and lender, at the end of the construction process, the loan can either revert to principal and interest, or it may be kept as interest only.

What else should be kept in mind?

Availability of funds

Contractors can usually only be paid once a lender is satisfied with the progress ­– though this in itself can be a useful factor in ensuring work is carried out to the highest standards.

Government incentives

For first time home-owners applying for a construction loan, it’s worth investigating to see an incentive or concession might be available. Both state and federal governments provide a range of grants and concessions designed to give Australians a helping hand into home ownership, some of which run into tens of thousands of dollars (varying according to State).

Construction loans – the key points recapped:

Save interest – Because interest is calculated on the outstanding balance, rather than the maximum loan amount, construction loan recipients pay less interest on the loan. For example, if a borrower has been approved for $300,000, but only drew down $150,000 for the preparation phase, and $25,000 as an initial payment to their builder, they will only be charged interest on the $175,000 that has been drawn down, rather than their total limit of $300,000.

Lower repayments – During the construction phase, loan repayments are interest-only, payable only on the amount of the loan that has been drawn down – which reduces overall repayments and boosts cash flow while work is being carried out.

Extra reassurance – With payment being delivered in stages, this ensures that funds are not made available until the builder’s work can be inspected and approved by the borrower and a registered valuer, so that builders or contractors aren’t being paid for work that hasn’t been done, or hasn’t been done properly.

Interested in finding out more about a Regional Australia Bank's Construction Loan? Talk to one of our Home Lending Specialists today.