1300 529 603

Toll Free Number

1300 529 603

Toll Free Number

How do interest rates work on a construction loan?

Construction worker carrying materials | Financial Information | Construction Loans

Table of Contents

If you are planning on building your dream home, you have probably already begun to research housing finance and the loans that you’ll need in order to build. The most vital piece of funding that you will need is a construction loan. Being approved for one of these will enable you to fund your build, and cover any potential hurdles that you could come across while construction takes place.

When you are applying for a construction loan, it is important to be aware of the interest rates that can go along with them. That’s why we have put together a guide for you below.

If you are approved for a construction loan, the interest rates that you will get are different as the payment will not come as a lump sum.

Instead, you will only pay interest on the amount that you have withdrawn. However, there are some instances where construction loans can incur higher interest rates than usual. If you are wondering how interest rates work on a construction loan, look no further.

What Are Construction Loans?

Happy couple looking at loans | Financial Information | Tiger Finance

A construction loan gives you the money that you need in order to build a home. Unlike a standard mortgage, the term on a construction loan only lasts for the duration of time it takes the building process to be complete—usually one year or less. Once the construction has been completed, you then transition to a mortgage.

Compared to finding a mortgage to buy an existing house, applying for a construction loan can potentially present a number of hurdles. Requirements can sometimes include higher credit scores being needed, bigger down payments and proof of a detailed project plan in order to move forward.

How Does Interest Work On A Construction Loan?

Couple finalising buying property | Financial Information | Tiger Finance

As construction loans are progressively drawn throughout the building stages instead of in one lump sum, interest is normally calculated based only on the funds used so far. That means that if you have a $400,000 loan and you have only withdrawn $80,000 so far, you’ll only be charged interest on that $80,000 amount instead of the full sum.

By making progress payments in the form of your interest payments rather than paying a lump-sum up-front, you’ll be protecting yourself against financial loss. You will also be able to ensure that the work is completed to a satisfactory standard before you provide the builder and construction team with any more funding. This makes it easier to make sure any problems that come up are solved as they happen, rather than having a list of issues to fix at the end stage of construction.

Valuations can be performed by your lender at any time during the build to make sure that no corners have been cut in the building process itself, and that the build is continuing according to both plan and schedule.

This is done to reassure the lender that everything is moving ahead as it should be and that there won’t be any setbacks when it comes to the loan repayment.

Most construction loans available in Australia are interest-only for the duration of construction so that while your home is being built, your costs are kept to a minimum. After this period, the construction loan will revert to a home loan.

It is completely up to the lender on what interest rate they may decide on, though additional fees do tend to apply. Typical fees for construction can include additional valuation fees during construction.

However, construction loans can often attract higher interest rates, so it’s important to do your research before signing a contract so that you don’t end up paying more than you need to.

Although construction loans are not always the cheapest home loans, there are still many competitive interest rates available. Typically during the construction, the interest rate will be slightly higher, but it then reduces when the work is complete.

Where Does Tiger Finance Come In?

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

We’ve helped countless Australians with both good and bad credit ratings to get funded for their dream build. We understand that lending criteria from other lenders are too strict, and can stop you from achieving your goals. That is wrong, and it shouldn’t hold you back.

How We Can Help

Our finance specialists can help you find the right construction loan for your project. Construction finance is a complicated topic, and we will find a loan that makes your dream project that much easier.

If you are one of the many Australians finding getting a construction loan difficult, Tiger Finance can make the process simple and pain-free. Call us today to get started on your dream build!

Table of Contents

Find MOre Information