Building your dream custom home is an exciting journey, but it requires a different type of financing compared to purchasing an existing property. Construction loans offer a specialised solution that works alongside your building timeline, providing funds when you need them most.
What Makes Construction Loans Different
Unlike traditional home loans where you receive the full loan amount upfront, construction loans operate on a progressive drawdown system. This means you only access funds as your build progresses, and crucially, you only pay interest on the amount drawn down at each stage.
The beauty of this system is that it aligns with your actual spending. When your registered builder completes the foundation work, you draw down funds to pay them. When the plumbers and electricians finish their stage, you access more funds to cover those costs.
How Progressive Payments Work
Your construction loan operates through a Progressive Payment Schedule that matches the various stages of your project. This schedule typically includes:
• Foundation and slab completion
• Frame and roof installation
• Plumbing and electrical rough-in
• Internal fit-out and finishes
• Practical completion
Each drawdown requires inspection and approval from your lender to ensure the work meets the agreed standards. This process protects both you and the lender throughout the construction process.
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Understanding Interest and Repayment Options
During construction, most borrowers opt for interest-only repayment options, which helps manage cash flow while you're potentially paying rent elsewhere or covering other housing costs. The interest rate applies only to funds you've actually drawn down, not the full loan amount.
Once construction reaches practical completion, your loan typically converts to a standard home loan with principal and interest repayments.
Getting Started: What You'll Need
Before applying for a loan, you'll need several key elements in place:
Land and Approvals:
• Suitable land in your ideal location within your price range
• Council plans and permits approved
• Development application completed (if required)
• Understanding of council restrictions and council regulations
Building Contracts:
• Fixed price contracts with your registered builder
• Clear specification of what's included and any Out of Contract Items not included
• Defined construction milestones and timeframes
Financial Preparation:
• Clear understanding of your loan amount requirements
• Budget that includes a Progressive Drawing Fee
• Plan for any additional payments that might arise
The Application Process
Applying for a construction loan involves a streamlined application process, though it requires more documentation than standard home loans. Lenders will want to see your building contract, council approvals, and detailed costings.
One unique aspect is the 'as if complete' valuation. This means the lender values your property as if construction is already finished, based on your plans and specifications. This valuation determines your available loan amount.
Accessing Construction Loan Options
As Australian Defence Force members, you can access Construction Loan options from banks and lenders across Australia, many of which offer preferential terms for ADF personnel. Different lenders have varying:
• Interest rate options
• Progressive drawing fees
• Timeframes to commence building within a set period from the Disclosure Date
• Flexibility around construction milestones
Beyond New Builds
Construction loans aren't just for building from scratch. They can also fund:
• Major home renovations that significantly alter your property
• Projects where you demolish existing property for a new build
• Some house & land packages where construction hasn't commenced
For smaller projects, a home improvement loan might be more suitable than a full construction facility.
Planning Your Custom Home Journey
Success with construction loans starts with thorough planning. Make a plan that covers your timeline, budget, and contingencies. Consider factors like:
• How long you can stay in your current accommodation
• Buffer funds for unexpected costs
• Your capacity to pay sub-contractors if needed
• Insurance requirements during construction
Building a custom home through a construction loan offers the opportunity to create exactly what you want while managing your finances effectively. The progressive nature of these facilities means your money works harder, and you're not paying interest on funds you haven't used yet.
Whether you're looking at construction loans for ADF members specifically or exploring house & land package loans, understanding how these loans work helps you make informed decisions about your build.
For ADF members considering their property options, construction loans can be part of a broader strategy that might include expanding your property portfolio or working with low deposit loans to maximise your opportunities.
Working with a renovation Mortgage Broker who understands both construction lending and the unique circumstances of Defence Force members ensures you get the right structure for your situation.
Call one of our team or book an appointment at a time that works for you to discuss your custom home construction loan options.
