Building your Dream Home
Everyone has seen Grand Designs and thought about building their own dream home. So, why don’t most of us end up doing this? The entire process seems so daunting and complex. As children we’re scared off by the fable of the three little pigs who created houses of straw, sticks and brick…. Then along comes the big bad wolf. Your story needn’t be so scary. We can tell you about Construction Loans, and how these loans work. We will familiarise you with this and release some fear by demystifying the whole process.
Split the Difference
So, you’ve found the perfect bit of land and you have a great builder. What now? You won’t need to get a full mortgage on the future house and the land together. You can split the mortgage into a Land Loan and Construction Loan. This way you avoid being charged interest on the entire amount. You pay interest on the Land Loan and the Construction Loan is only payable on each portion of the loan, as it’s drawn-down during each construction phase. For example:
Sally has a $300,000 Construction Loan. By the 3rd progressive payment, she has only drawn-down $150,000. Sally would only pay interest on the $150,000.
Note: Most banks require you to use all of your equity before they release the next payment.
You’ll need a little extra documentation than usual before securing your Construction Loan. Before you begin your application, you would have already secured:
Council Approved Plans,
Your Builder’s Contract,
Any Subcontractors Tender.
A valuation will then be performed before the first payment can be made to the builder. The builder will create a Schedule of Payments, so the loan can be drawn-down in instalments. These payments would look something like these 5 stages:
1. Slab down or base
This is an amount to help you lay the foundations of your house. It covers the ground preparation, as well as the preparation for plumbing and services.
For the framing of your property. It covers partial brickwork, roofing, trusses, and windows.
For external walls, windows and doors. Securing your property and making it “Lockable.”
4. Fit-out or fixing
For internal fittings and fixtures. It covers plasterboards, the part-installation of cupboards and benches, plumbing, electricity, gutters and tapware etc.
As it sounds, this will include the completion of any contracted items, as well as any finishing touches such as painting and overall cleaning.
For the lender to make each payment to the builder, you will need to fill out a drawdown request form from your lender and submit it to your builder. The builder can then send the lender your form with an invoice for the money for that schedule.
After the lender is satisfied that all work has been completed and is up to the standard expected in the valuation, the drawdown can be completed with a final payment to the builder.
Building your own home doesn’t come without its risks, nothing worthwhile ever does. Be like the third little pig – and make sure your financial structure is sound, to keep any wolves at bay!
The schedule is very important, you, the lender and the builder all need to be happy with it. Make sure there is small contingency built into it.
Any changes to the plans or the builders contract can trigger a reassessment of the loan. It’s hard to foresee everything, however make sure you’re happy with the plans before you begin your finance. It could also be worth paying for any minor changes from your own pocket, rather than risking any loan reassessment.
Don’t just go with the cheapest builder, as it may cost you so much more in the end. Make sure you have an accredited, registered builder with great references. View their previous projects. Also talk to their previous clients about their process and experiences with them. A good builder won’t mind you doing this and will be proud to show off their great work.
Some lenders only make remaining funds available after the completion of construction, so problems can arise if the builder has uncompleted work, that needs to be paid for. Getting the right advice and Construction Loan is crucial.
If you don’t want to pay for any subcontractors from your own pocket. Include them as part of the main builder’s contract, from the beginning. This means that they can be paid for by the builder, as schedules of work are completed and drawn-down.
Not just a Fairy Tale
In conclusion we hope you feel like this can be your reality and a viable option for your home. All that’s left is to get your deposit together, (read about your options here): https://www.mortgageandfinancehelp.com.au/first-home-buyer-news/how-buy-without-20-deposit/ And get a great Finance Broker like myself who has the expertise to help you make this a reality.
This information is not to be relied upon without speaking to your finance broker, tax agent and financial adviser.
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