What To Expect With A Deposit For A Construction Loan

If you’re thinking about building a house, you might be wondering if you will need a deposit for a construction loan. In most cases, you will need to provide a deposit to your lender, although the exact figure may vary from lender to lender. Whether or not you have insurance may also affect the percentage of deposit needed.

Read on below to find out more about construction loans, and the deposit that you may need.

What to expect with a deposit for a construction loan

For construction loans, your lender will generally require you to need to have at least a 5% deposit of the property’s projected value, if you have Lender’s Mortgage Insurance. In the case of owner-builders, up to a 50% deposit may be required by your lender. Without insurance, up to a 20% deposit may be required before construction can start. However, this may vary from lender to lender.

Do you need a separate loan for your land?

If the land is registered – If the land is registered you will generally only need only one loan. As construction starts on your property, the bank will make progress payments to your builder. Your mortgage repayments will then go up each time a progress repayment is made. Once your property has been completed, you will be making loan repayments on the total amount of your construction costs and land.

If the land is unregistered – If the land is unregistered you may need two separate loans. Firstly, you will need to organise the loan for the land. Once the land has been settled, mortgage repayments against the land loan amount will need to be made. The actual construction loan should be applied for once you are ready to commence construction on your land. Once your loan has been approved, your lender will issue an ‘Authority to Commence Construction’. This will allow your builder to start the construction. During this time, you will also be making repayments for your land loan. Once your construction has been completed, your lender will be able to refinance both of your loans into one single loan.

Types of construction loans

Construction to permanent loan – In construction to permanent loans, the money is typically drawn out in stages as the build progresses. Instead of receiving one large sum at the beginning of your build or renovation, you’ll receive what is needed to lay the foundation, and then put up a frame, and so on. These loans are ideal if you have a definitive timeline and construction plan to follow.

Renovation loan – A renovation loan is for you if you have purchased a property that needs major work completed on it. This type of loan is generally smaller in value, as the cost of renovations is significantly less than those of building from scratch.

Owner builder construction loan – Owner builder loans are when the borrower also acts in the capacity of the home builder. Most lenders do not allow this type of loan, due to the complexity of construction and the understanding of building codes. Lenders that do allow this loan generally need the borrower to be a licenced builder.

Construction only loan – This loan is to provide the funds necessary to complete the building of the property and must be paid off in full once the building has been completed. The funds from these loans are dispersed based on the percentage of the project that has been completed, and the borrower is responsible for covering the interest payments on the amount drawn.

End loan – An end loan is another name for a mortgage and is needed after construction has been completed.

Off the plan loan – An off the plan loan is where a developer has a pre-approved plan to construct an apartment complex. To ensure a quick sale on completion, the developer will offer the apartments for sale before construction has begun. This means that the balance of the purchase price is paid when construction has been completed.

The advantages of construction loans

Before you consider a construction loan, it’s important that you take the time to find the right loan. This means researching interest rates, fees, and construction terms. There are many benefits to applying for a construction loan, such as:

Financial protection – By making progress payments instead of paying an upfront lump-sum, you are covering yourself against financial loss. You are also able to make sure that the construction itself is being completed properly before you provide your builder with any more money to move forward.

Reduced interest – If you’re only making partial payments then you’ll only incur interest on the amount that you’ve drawn-down. You won’t pay interest on the money left in the bank.

Pay as you go – A construction loan is different from a regular loan in that it is not paid out in one transaction. Instead, you are given funds from your lender as the invoices from your builder come in.

Flexible terms – A construction loans from a lender can be tailored quickly and effectively to your constructions needs. It is possible that your lender may be able to work with you to make sure that draw schedules and interest payments are set in a way that benefits both parties.

The freedom to choose – Perhaps the biggest advantage of a construction loan is being able to build your dream house. Most homes on the market are pre-built, and therefore, you just choose one that might be close to what you want. With a construction loan, you get to choose your contractor and architect and customise your plans to what you want and need.

Where does Tiger Finance come in?

With Tiger Finance, we can help to get you a loan in four easy steps. You will have a free consultation with one of our specialists, and we will tailor-make you a loan. We will negotiate with lenders on your behalf before you are approved.

We have helped countless Australians with both good and bad credit ratings to approved for a construction loan. We understand that lending criteria from other lenders are too strict and can stop you from achieving your goals. That is wrong, and it should not hold you back.

How we can help

Our finance specialists can help you find the right loan for your project. Getting a loan can be complicated, but we will find a loan that makes the process that much easier.

If you are one of the many Australians finding getting a loan difficult, Tiger Finance can make the process simple and pain-free. Call and speak to one of our loan specialists today for your free initial consultation.