The great Australian dream of owning your own home is an extremely strong part of our culture. Many people plan and save for their homes for years only to find that they can’t find the house that is exactly what they are searching for. So many people decide to build their own home or do a major renovation and in order to do that they very often start to research construction home loans.
A construction home loan is designed to provide the funds for a brand new home, although sometimes a major renovation can also qualify. The main feature of construction home loans is that the total money that is borrowed is paid in chunks and this is usually at the end of each stage of construction.
An example of how construction home loans are often paid out would be the first payment might be made once the foundations of the property have been laid. The next stage might be once the walls are in and windows fitted. The next stage of payment might be when the property is at lock up. These stages can vary depending on the details of the particular loan you are considering taking out.
A good broker who specialises in the area of construction home loans and/or owner builder loans can often save you money and time by helping to guide your through the details of different offerings.
An experienced broker will also be able to show you ways in which you can demonstrate the high probability of success of your project. This is important as statistically construction home loans have a higher level of default than standard home loans. This means that some banks and other financial institutions are reluctant to sign off on construction home loans and you need to make sure you make the argument for your project as compelling as possible.
There are a number of advantages to using a construction home loan. The first of these is that it means that interest is only required to be paid on the money that has actually been borrowed and therefore can save money. Another advantage of a construction home loans is that you can pay only for the land portion prior to the beginning of construction – again this can be a significant cost saving.
Another item that many people consider to be an important advantage of a construction home loan is that once the construction process has been completed and you have moved into your new home, the construction home loan will revert to a standard variable rate home loan.
In the small print of most construction home loans is the ability to take several years to complete construction after the date of settlement. There is also often the ability to take the total cost of the construction loan and divide it between 2 accounts. This can allow you to identify transactions that are personal and transactions that are investments.
There are also several disadvantages with construction home loans. One of these disadvantages is that in many cases the loan to value ratio is quite low. This can often mean that people who want this sort of loan have to have significant amounts of their own money to put into the project.
Another limitation of construction home loans is that funds are usually released at pre-arranged stages. Before funds are released, there is often a requirement that the project is inspected and this can slow down the release of funds. Another limitation of construction home loans is that in many cases, plans that have been approved by council as well as a fixed price tender is often required by the banks when the application is first made. This can mean that you are locked into the project right from the start and there may not be the ability to make significant changes throughout the process.