Building your dream home? a guide to construction loans 🏗️

Key Takeaways:

• Exempt from Standard LVR Limits: New builds are exempt from Reserve Bank Loan-to-Value Ratio (LVR) caps, enabling buyers and investors to secure construction finance with significantly lower deposit thresholds.
• Loan Terms Driven by Contract Structure: Borrowing limits and drawdown mechanics depend on contract type—Turn-Key requires payment upon completion, Fixed Price involves staged progress payments, and Labour-Only demands higher deposit reserves and builder experience.
• Interest-Only Progress Drawdowns & Buffers: Interest is charged only on drawn-down balances during construction, while lenders factor in mandatory 10%–20% cost overrun contingencies and require valuations to approve each progress payment.
• Strict Final Settlement Requirements: Releasing the final loan portion (typically 5%) requires full house insurance, a valuer's completion certificate, and a council Code of Compliance Certificate (CCC).

Financing the construction of a new home is quite different from buying an existing one, so it's crucial to work with someone who understands the nuances of construction loans. The best time to figure out your finances is early on, and a Mortgage Adviser can help determine how much a bank might lend based on your budget and mortgage servicing ability. New builds are often exempt from the 20% deposit requirement for first-home buyers and 30% deposit for Investors due to Reserve Bank LVR rules, making them an appealing option for those with a smaller deposit. However, each bank may have different criteria, so consulting a Mortgage Adviser is essential.

The construction contract you choose will affect how much you can borrow. With a Turn-Key contract, you don't pay for the property until it's complete, while a Fixed Price contract requires progress payments as the build reaches certain milestones. Labour-only contracts, which require a larger deposit, are best for experienced builders. Banks will often require a valuation report to approve each payment during construction. Keep in mind that progress payments mean you start paying interest from the first drawdown on the balance that has been drawn, so planning is key, especially if you're paying rent or another mortgage during the build.

Most construction loans are interest-only until the build is complete, after which they switch to principal and interest. Some banks offer special rates or packages for new builds, like ANZ’s BluePrint to Build, which could save you money. Construction finance is usually valid for 12 months, so staying in close contact with your Mortgage Adviser, who will be assisting with drawdowns, is critical.

With construction loans by way of a fixed-price contract or Labour-only, there are also contingencies that need to be taken into account for cost overruns. These contingencies are built into the lending assessment and can range from 10%-20% depending on the type of contract and lender. Just because the contingency is built in does not mean the lender will advance the funds for any overruns, as they will wish to understand if there are any further overruns ahead in the build.

As your home nears completion, it’s important to notify your Mortgage Adviser of the handover date. Before the bank releases the final payment (generally 5% of the build contract), you’ll need house insurance, a valuer’s completion certificate, and a Code of Compliance Certificate from the council. Proper planning, choosing the right lender, and working with an adviser who will help you navigate the complexities of construction loans and ensure a smooth building experience. Reach out if you or anyone you know could benefit from having a chat with us.