Many overseas clients aspire to build their own house in Australia for investment purposes. If you are one of them, read on about how financing of land and construction works.
Construction Home Loan
It works differently from the regular home loan for apartments. The loan amount is disbursed in 2 major parts for (1) the land and (2) the construction. The mortgage for the land will be disbursed in one tranche and construction loan will be done so progressively according to the construction phases. Upon completion of the build, the amount will be fully disbursed according to the overall loan amount approved by the bank for both the land and construction. The bank will lend portions of the loan amount, in accordance to the construction schedule provided by the builder. This progressive disbursement is known as drawdowns.
Phases of construction home loan drawdowns
You would have agreed on the drawing plans of the dream house you want to build and receive quotations. After accepting these, the bank will liaise with you and the builder to disburse the money progressively. The builder will invoice you for each phase, and you will provide it to the bank for approval and disbursement of the amount. The bank will also schedule inspections on-site to ensure the progress is as per the invoicing.
Stage 1: Slab down or base
Construction begins with the building of the base. It involves laying the foundation, levelling the ground, installing plumbing, and waterproofing the foundation. This stage comprises 10% of the construction contract and takes a couple of weeks.
Stage 2: Frame
For stage 2, your bank will pay for the expenses incurred building the frame of your property. During this phase, your builder will focus on constructing the trusses, roofing, and windows of your home. This phase is worth 15% of the contract. It may take up to a month to complete.
Stage 3: Lock-up
The third phase is for the construction of external walls, doors, and insulation of the house. Time taken is about a month. Drawdown is about 35% of the build contract.
Stage 4: Fit-out
By now, the builder will move on to putting the shelving, cabinets, doors and tiles hence this stage is known as fitting out the house. Some plumbing and electrical systems works are expected. 20% will be further disbursed. A longer period of 4-6 weeks is required.
Stage 5: Completion
Finally, the house will be painted, tiles polished and getting it ready for handover to you. Fences will be installed too. These works take up to 2 months and the builder will request for the remaining 15% to be disbursed.
You may do your inspection of the house or hire a professional inspector who will provide a comprehensive report. Warranty will also commence.
Australia land and construction mortgage rates start from 4.x% for overseas non-residents investors
How does construction loan repayment work?
Throughout the 5 stages of the construction, your loan repayment is without principal, in other words interest-only. Only the portion that is drawdown will incur interest. For example, for an entire construction loan approved at $250,000, interest-only repayment will be made on the $62,500 drawn down by stage 2. Repayment will be interest * $62,500 / 12 months.
After completion of the house where the full loan amount is disbursed, interest-only repayment may continue depending on the lender’s loan terms. Or you may refinance the loan amount to another bank in Singapore or Australia.
If you have purchase a land and secure a construction contract, check out the Australia mortgage rates here. Our expertise with overseas customers and non-residents have resulted in 100% mortgage approval.