Building your new home is an exciting experience, especially if you’ve had a hand in designing its layout and architecture. However, many potential homeowners forget that building a home is very different from buying one — especially when it comes to getting a construction home loan.

So, if you’re part of the 10% of Australians set on building a new home instead of buying one, we’re here to tell you all you need to know about construction home loans.

What is a Construction Home Loan? 

When it comes to constructing a house, expenses primarily revolve around construction costs. These costs can vary due to factors, including the availability of labour, material supply and even weather conditions.

To account for this, construction home loans break up the total borrowing amount into disbursements for each construction phase to remain flexible to building costs throughout the building process.

How Do Construction Home Loans Work?

Construction home loans typically consist of two main phases:

Construction Phase: During this phase, you receive funds to cover construction costs as you progress through various building milestones. This ensures that you have the necessary capital to pay contractors, purchase materials, and meet other construction-related expenses. Also, you only pay interest on the funds disbursed during the construction phase, saving you money until the house is finished.

Permanent Financing Phase: Once your home is complete, the construction home loan transitions into a permanent mortgage, allowing you to repay the loan over an extended period.

The release of funds in a construction home loan follows a structured process. Typically, the lender releases funds at specific construction milestones. These milestones include tasks like completing the foundation, framing, roofing, and so on. An inspector verifies the completion of each stage before funds are released. 

This staged disbursement system ensures that you have the necessary finances at every critical juncture of your construction project, minimising financial stress and ensuring quality control. 

How To Get a Construction Home Loan

Applying for a construction home loan is a straightforward process that requires additional documents and approvals before the loan is granted.

When applying for a construction loan, you'll need to furnish the lender with several essential documents. These include various council permits and plans, a copy of your fixed-price construction contract, and any necessary insurance documentation. Your lender will also request personal information about your income and expenses to help with their evaluation.

Upon application submission, your construction plans will undergo a property appraisal to project your completed home's value — this valuation is a pivotal factor in the lender's decision to approve the loan.

If your loan application gets the green light, you'll need to provide a deposit as part of the process. While the minimum deposit is usually 5%, if your deposit is less than 20%, you may have to acquire a lender's mortgage insurance for loan security.

During the construction period, it will be your responsibility to verify the progress of work at stages of the building process. You may be asked to provide invoices that detail the expenses for completed work. This ensures that the loan disbursements align with the progress of your construction project.