Thinking about Buying Land and Having Your New Home Built?
Written on the 20 October 2013 by Callum Scott
The news that the number of home loans approved in August fell by 3.9% (Australian Bureau of Statistics) probably reflects a few issues. August was just before the election and probably a number of potential purchasers, including investors, held back until the result became clear. Property investors are however getting back in, and taking advantage of the historically low interest rates.
This makes it tougher for first-home buyers, given that many of the properties favoured by investors are those usually within the price range of first-home buyers. This demand will push up prices for these homes. Will this push first-timers towards new home purchases or construction? The latest data shows that approvals for construction loans have risen by 2.2%.
If you are a first-time buyer you may well be considering a new build using a construction loan. So what’s the difference between this and a standard mortgage?
Before looking at the difference between a construction loan and a standard mortgage, it is important to realise that the criteria for obtaining a construction loan are pretty much the same as those for a mortgage.
Therefore you need to approach the borrowing process in the same way. The amount you can borrow will depend on your deposit, income, assets, liabilities and savings or investment history.
A finance broker or lender will help you assemble the necessary documents and make the application for the loan.
The important difference between a construction loan and a standard mortgage is that whilst the home is being constructed, your only payments are for the interest being charged on the amount you currently owe at any given time.
Payments start with the purchase of the land, and then the amount you owe would gradually increase as you pay the builder for the completed stages of the build. Usually the interest is charged monthly or fortnightly.
A good guide to fair stage payments is found in a Victorian Government Act which lay down the following percentages of the full contract price:
1. Deposit 5%
2. Base 10%
3. Frame 15%
4. Lock Up 35%
5. Fixing 25%
6. Completion 20%
For some more information on stage payments, click HERE
Once the loan is fully drawn down, the construction loan is converted to a mortgage. This may still be interest-only if negotiated, or more likely a principal and interest mortgage at the standard variable rate or a fixed rate.