Construction loans: how do construction loans work

Construction loans

Building your dream home can be an exciting experience. Taking an idea and turning it into reality can be a rewarding experience if done right. When you build your own home you can decide how you want it to be.

It is not always trouble free. Constructing a home can be a long and expensive process and there are many possibilities that things can go wrong.

If you are borrowing money for the construction of the home then the lender is also taking on the risk that something will go wrong. The major risk is what the finish building will be worth. Some of the other risks include the quality of the builder. If the builder does not finish the building it can be very difficult to sell an unfinished home without providing a significant discount on the price. Even if the builder does finish the home, if the quality of the finished home is poor then the value may be less than expected.

Lenders don’t like taking on a lot of risk and will put in measures / requirement to reduce this risk. In the case of lending to build a home some lenders offer home construction loans, with all their strict criteria, specifically for this purpose.

Typically, a qualified and licensed builder must be engaged. Furthermore, the lender will want you to have a fixed price contract (not a cost plus) with the builder so the lender knows exactly how much it will cost to finish the building. Owner builder construction loans are available but generally only for builders who are building their own property. This means that you may have an especially hard time finding an institution to finance your project if you are intending to be an owner builder.

Having a fixed price with a licensed builder is only one of the many requirements of getting a construction loan.

Did you know that some lenders will allow you to use a construction loan for a three or even four units/townhouses development? If you are undertaking a small development contact us to go through your options.

Find out more about construction loans

Find out about the requirements and process of getting and using a construction loan. Everything you need to know.

Oak Laurel Mortgage Brokers – Construction loans made easy!

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Home loans

Home loans

The amount you can borrow will depend on your circumstances including:

 Your income(s)

 The amount of your other loan repayments and other commitments

 The amount of the deposit (cash or equity) you have

 Your eligibility for any grants or rebates such as the First Home Owner Grant or Stamp Duty Concessions

 It is also important that you are able to repay the loan comfortably, even when interest rates (and your repayments) increase in the future.

The interest rate you will be able to get will depend on your circumstances and the loan you choose. Different lenders have different interest rates and they will assess your income and ability to repay the loan when considering your loan application. You will be able to get the amount of loan approved by the lenders. ‘Low doc loan’ which has a higher interest rate is needed for self-employed and unable to supply all of the regular documents required. Generally, the large the amount you borrow the lower the interest rate. A mortgage broker at Oak Laurel can assess which ones have good interest rates and which lenders can approve your loan application. It is difficult to determine a single cheapest home loan. Depending on your situation and how you manage your fund means that using some features may make a loan cheaper. If you have a guarantor with a property you may not need a deposit. If you do not have a guarantor, you will either need cash deposit or provide equity from another property as security. If you are borrowing more than 80% Loan to Value Ratio most lenders will require you to pay Lenders Mortgage Insurance. Lenders mortgage insurance can be a costly expense if your deposit is very small your loan is large. You may also be able to borrow the funds for the lenders mortgage insurance. Most lenders require that you show genuine savings for loans above 80% loan to value ratios. Some lenders do not require you to show genuine saving below 90% loan to value ratios. Genuine saving are funds that you can show that you saved rather than received as a gift. Lenders will require you to provide documentary evidence about your income, employment, liabilities, genuine savings (when you have a loan to value greater than 80%) and property details. They will also need to check your credit file. Each lender have their own criteria for assessing home loan applications. However, all lender base their assessment on four main criteria.

 Serviceability – can you afford to repay the loan, not just at today’s interest rates but when interest rates increase in the future? This considers your income, liabilities (other loan repayments) and other expenses.

 Employment and residential stability. This is things like how long you have been in your current job and or industry or residence. If you have switched jobs and industries and moved around a lot this may concern lenders.

 The amount of deposit that you will contribute. The greater the deposit (equity may be used in place of cash for a deposit) you provide the lower the risk to the lender.

 The security that you provide (the property that the mortgage is over) will influence the minimum amount of deposit that you contribute. Some properties are considered high risk than others. A well located residential property in a capital city will be considered lower risk and easier to sell quickly than a property in a rural area.

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Property development finance

Australia’s population is growing at a fast pace

With the population of Australia growing and the demand for housing (and other properties) often outstripping supply, the construction of more housing is required to meet Australia’s need.

So what is the solution? It is obvious really, we need more development. We need private individuals or companies/entities to develop or re-develop Australia’s landscape to accommodate our growing population and demand for property.

Making a property development project happen

You may be a smart operator and have identified some real development opportunities but unless you are already super rich you are going to need finance to make your project happen. This can be where some would be developers and even experienced developers come unstuck leaving their potential project as just a dream or worse (potentially much worse) if they committed without securing the finance in advance.

Getting property development finance approved

Getting your property development funding approved does not have to be a problem if the project has real merit. However, banks and other lenders can be extremely risk averse if there are some unresolved problems and end up rejecting your proposal or giving you conditions that you just can’t meet.

So what is the solution? Using an finance broker with experience getting development project finance approved can be a valuable asset to your team of property development professionals (along with your architect, builder, lawyer, project manager etc..).

Want to know more about the factors that impact on funding approvals?

Find out how to get your property development approved.

Do you have a development project that you need to finance?

Contact a property development finance broker.