A series of government grants and historically low interest rates have created a favorable environment for Australians to build their own homes – and many have taken the opportunity.
Seasonally adjusted figures from the Australian Bureau of Statistics (ABS) show new home construction loans soared 11.5% in October, up for the fourth consecutive month since the federal government announced the program. HomeBuilder in July.
The number of loans for new home construction rose to 6,631 in October, representing an increase of 82.8% year-over-year. The increase pushed the monthly value of loan commitments to $ 2.85 billion, reaching a new high since the record began in 2002, and was the main contributor to the overall 0.8% increase new homeowner home loans.
Housing Industry Association (HIA) economist Angela Lillicrap says the HomeBuilder program has been the catalyst for improving consumer confidence in the housing market, but added that Other housing incentives, including historically low interest rates, have also played a role in strengthening the market.
Recently, the Reserve Bank of Australia (RBA) decided to make further adjustments to the cash rate, lowering it to another historic low of 0.1%. The central bank also said rates will stay at that level for at least another three years, giving potential buyers a sense of certainty.
With all of these incentives in place, it's no surprise that many Australians are lining up for the opportunity to build their dream property. However, getting a construction loan is a complex endeavor that requires a lot of research and preparation. Here are some of the basic things you should know when applying for a construction loan.
What is a construction loan?
A construction loan is a type of residential financing designed to help finance the construction of a new home or the major renovation of an existing home. It covers all expenses incurred during construction.
This type of financing works differently and is more complicated than a standard home loan, which is used when buying an established property, for a number of reasons. For new construction, assessing the value of the property can be more difficult because the house does not exist yet. This situation can also lead to borrowers being charged a higher interest rate.
Construction loans also often charge interest payments only for the construction period, which is initially 12 months. Once construction is complete, loan repayments revert to principal and interest for the term of the mortgage.
How do construction loans work?
Another major difference between construction loans and regular home loans is the way repayments are calculated. Lenders often divide the loan into several stages, called a progressive withdrawal, and make payments at each stage. The steps may vary from lender to lender, but generally include the following phases or withdrawals:
First floor: lowered slab or base
The first levy covers the cost of founding the property. This can include leveling the floor, installing plumbing, and waterproofing the base of the house.
Second stage: Frame
This part of the financing pays the cost of framing the property. It also includes the construction of trusses and windows, roofing and partial masonry.
Third step: locking
This step is called locking because it involves all of the processes necessary to make the property "lockable". The amount covers the cost of placing the exterior walls and insulation, as well as the installation of windows and doors.
Fourth stage: development or fixing
During this levy, the lender pays for the installation of the interior fittings and fixtures of the property. Coverage may include interior siding, tile, and partial installation of shelves, cabinets, and cupboards. The amount also covers the installation of plumbing and electrical systems.
Fifth step: completion
This portion of the funding covers the cost of finishing, including painting, polishing walls and floors, installing fencing, and general cleaning.
Borrowers are advised to do a thorough inspection of the property after construction is complete to ensure the home is built according to plan. Any problems or additional work required should be reported to the builder within three to six months of construction of the property.
How is interest calculated on a construction loan?
Another unique feature of a construction loan is the way interest is calculated. Most lenders determine interest charges based on funds spent when loans are taken at specific stages of construction. As an example, if on the fourth progress payment only $ 250,000 of a loan of $ 350,000 was used, interest will only be charged on the $ 250,000 spent.
The loan also remains interest free for the duration of the construction. Once the property is built, the borrower has the option of asking the lender to convert the loan into principal and interest or continue with an interest-only plan.
Some homeowners choose to refinance their loans after construction is complete or use a final loan, while others turn their loans into a standard mortgage.
How do I apply for a construction loan?
Like standard home loan applicants, borrowers taking out a construction loan are subject to normal loan criteria, which means they must provide details of their income and expenses. . However, they must also submit additional documents, including the following:
Construction contract
This document describes the construction stages, the progress payment schedule, the schedule and the construction costs of the property.
Construction plan
This document shows the layout and size of the house under construction.
Quotes
This document shows the estimated expenses of additional elements of the property, including the installation of solar panels, swimming pools or landscaping. Lenders can review these additions to determine if they can increase the value of the home.
Owner-builders or borrowers who will carry out the construction themselves may also be required to provide specific documents, including copies of plans and permits approved by the council, licenses for the construction work, an overview full construction costs, timelines, invoices, and insurance policies.
Once approved, the borrower must make at least a 5% down payment. However, just like a standard home loan, any deposit less than 20% of the loan amount may require mortgage insurance from the lender.
