Archives for October 2015

Why are construction loans so complicated?

Building a home is a complex process that involves multiple parties including builders, contractors, lenders, solicitors, accountants, quantity surveyors and the council. With so many people involved in the process, there’s always the possibility that some experts won’t understand each other’s field and things may go wrong.

It can also be exceedingly complicated to obtain finance. The majority of mortgage brokers and bank employees don’t understand construction at all!

As a result, construction loans are often set-up with many errors. The loan amount may be incorrect or it may be delayed, due to constant amendments. We have created this guide to help you ensure that you don’t have these same frustrations with your construction mortgage.

How does the construction process work?

When you apply for a loan, the lender will need a copy of the building contract/tender and the plans. They’ll ask their valuer to estimate the on-completion value of the property and will assess your loan on the lesser of the land price plus cost of construction or the on-completion value.

Once your loan has been approved, the lender will issue a loan offer for you to sign and return, just like with any other home loan. When your builder is ready to begin receiving payments from the bank he’ll need to provide additional documents, such as the final council approved plans, his insurance & drawdown schedule.

How do you request that the bank pay your builder directly?

• The builder will send you an invoice.
• You’ll then complete and sign a drawdown request form (available from your lender).
• Send the drawdown request form and the invoice to the construction department of your lender.
• The lender may require a valuation to confirm the work that has been completed so far.
• The funds will be advanced to your builder generally within five working days.
• Repeat this process for each progress payment required by the builder.

Changes to building contract?

Did you know that if you make an amendment with the builder and the contract price changes by just $100, the lender may need to reassess the loan all over again?

So how can you avoid changes causing a problem with your home loan?

• Make sure that the building contract you provide the lender with is the final complete contract.
• If you make any small changes then try to pay for them from your own funds, or have the builder reimburse you for any discounts after construction is complete.
• For any large changes, you’ll need to notify the bank and then allow up to one month for the bank to reassess your loan.
• “Keep it simple” works very well with the banks! If you keep making changes then expect to have significant delays.

Minor quotes?

It’s quite common for people to hire contractors to complete other work such as landscaping, utility connections, swimming pools or site works. Try and get all of these minor quotes included in the building contract and then have the builder pay for them.

This may not work for the builder, so discuss this with us and your builder before deciding on the best way to go.

Sometimes the banks will only release funds for other quotes on completion of construction. Be careful because you may have agreed to pay the contractor up front!

One loan or two?

If you’re buying the land, you may want to consider splitting the loan into a “land loan” and “construction loan”, which means that they’ll be advanced at different times. If this isn’t done then you’ll need to put all of your required funds in at the time the land settles. Any LMI will be charged at land settlement.

We’ll discuss this with the lender to confirm their process and find out when you’ll be required to contribute your deposit.

How much deposit do I need?

Most people go over budget! We recommend that you keep saving during the construction process and try to avoid any large expenses until construction is complete.

As a general rule, we try to ensure that you get approval for a slightly higher loan amount. This is to ensure that there are plenty of funds available. There’s nothing worse than running out of funds when your house is almost complete!

If you’re borrowing 100% of the cost of land & construction as with a “family pledge home loan”(guarantor loan), then you’ll still need some funds on standby to allow the builder to create the building contract & apply for council approval. This is because the lender can’t release funds outside of the specified construction drawdowns.

Additional work to be completed by contractors?

In some cases, part of the work isn’t being completed by your builder.

Some common examples are:

• Swimming pool
• Pergola
• Driveway
• Power pole / power connection
• Landscaping
• Site clearing
• Shed, dam or other hobby farm improvements

If you can provide a formal written quote for this work then we can often get the bank to extend the loan for these costs.

It really depends on the nature of the work and the lender that we’re working with as to whether this will be possible or not.

The key is to give us this information at the beginning of the process! If you tell us about the additional work later on then we can’t get the lender to finance it.

Be careful as some lenders will only release money for the additional work once the main house is completed. This may not suit your construction schedule and so in some cases we need to change to another lender.