How does building finance work?

There’s loads of options when it comes to getting a loan to fund your new home build. In Australia these are known as construction loans.

Here’s everything you need to know.

How is a construction loan different?

Construction home loans are specifically designed for people who are building a new home or demolishing their existing home and wanting to build the home of their dreams on the same land. This is a very different type of loan to one designed for people buying an established property.

A construction loan will be drawn down on throughout the construction of your home. That means that your loan value will go up as your home draws closer and closer to completion, as will the amount you are required to repay.

At first, your construction loan will most likely be interest only. This tends to be for the first 12 months, after which time it will revert to a standard principal and interest loan.

A common mistake we see is when people finance their home and land separately. Combining them not only saves you time but also money. Our brokers are happy to talk you through how this all works though.

When do you draw down on your loan?

Over the course of your new home build, your home builder will require payments to complete each stage. These will usually be for:

  • Slab down. This amount is for the laying of the foundation of your new home and includes levelling, waterproofing and the foundation.
  • Framing. At this stage the frame of your new home is built, and your home really starts to take shape. The roofing is also included in this stage and some of the brickwork.
  • Lockup. Things are really starting to get exciting now. Your external walls are going up and your doors and windows are being installed.
  • Fittings. This is the stage you won’t see as much happening because the inside of your new home is being fit out. The plasterboard, some cupboards and benches, plumbing and gutters will go up at this stage.
  • Completion. To finish the job a final progress payment is required. This is where the finishing touches will be applied. Plumbing will be completed, electrical and your new home will be cleaned so it’s shiny and beautiful when you move in.

Your repayment amount will change over the course of your new home build as more funds have been drawn down. For example, if you’ve only drawn down half of your loan amount interest will only be charged on that amount and therefore repayments will only be made on that amount.