How Construction Loans Work
Construction loans operate as staged payments, meaning that the lender only has to repay the bank after several major construction phases of the home have been completed. This step-by-step approach to lending means that the lender only has to pay interest on the loan amount accrued after the completion of a particular construction phase.
At the same time, the loan amount can gradually increase with the value of the home as construction proceeds, enhancing the lender's net equity value in subsequent construction phases.
Once construction payments are approved and the property is in place, the bank begins making progress payments based on the construction phase.
There are generally five or six stages.
Stage 1: Foundation
The amount credited was used to level the property's foundation, which included leveling the ground, as well as foundation plumbing and waterproofing.
Stage 2: Framework Stage
The loaned amount was used to build the structure of the house, which included brickwork, roofing, trusses, and windows.
Stage 3: Locking
The loaned amount was used to place exterior walls as well as interior windows and doors.
Stage 4: Decoration and fixing
The amount credited was used to do the renovation of interior fittings and fixtures, which included plasterboard, cabinetry, partial installation of benches, and plumbing, electrical, and drainage ditches.
Stage 5: Completion
The amount credited is used to deliver contract items (e.g., builders, equipment) as well as labor and material costs for plumbing, electrical and overall cleaning.
Application Process for Construction Loans
1. Prepare documents and submit your application
As with other home loans, a personal identification document as well as proof of income is required to apply for a construction loan.
In addition to this, the application for a construction loan requires the following documents related to the construction contract.
Council-Approved Plans and Specifications
Signed & Dated Building Contract
Civil Construction Insurance and Worker's Compensation Reporting for Builders
2. Bank Approval
Once the application documents are submitted, the bank will review them. During this process, the bank will also need to send an appraiser to value the future completed house with reference to the construction contract.
Once approved by the bank, the loan applicant will be issued with Loan Documents, which will be signed and returned to the bank.
3. Bank lending
Before the stage of payment of the construction loan, the applicant needs to provide the bank with an application for withdrawal of the money released to the builder, a receipt for the paid portion, and the bank will release the money to the builder after checking that the construction of the house meets the requirements.
Advantages of Construction Loan
1. Save a significant amount of stamp duty.
The stamp duty for buying land first and then building a house is based on the value of the land and the house part is not subject to stamp duty, while the stamp duty for buying an existing house is based on the total price of the existing house.
2. More selectivity and greater flexibility.
3. Construction starts time and delivery time can be negotiated with the builder.
4. Stage Payments
This means that the lender only has to make payments to the bank after several major construction phases of the house have been completed. This step-by-step approach to lending means that the lender only has to pay interest on the loan amount accrued after a particular construction phase has been completed.