Construction and Associated Finance
For some, whether you are a first home owner or otherwise, the decision to construct a home brings with it some additional challenges. As home dwelling construction in Australia has been at a frantic pace over recent times I thought it worthwhile providing some useful tips or perhaps reminders in relation to the associated construction finance side, & also some general information surrounding the actual building contract. I have not included ‘owner builders’ in this article.
Have regulated progress drawdowns in line with the builders progress schedule (contained in the appropriate Housing Industry Australia (HIA) building contract).
Before a bank/lender releases any loan funds the clients contribution to the build must be made. This protects the value/equity in the project as it moves through the stages of construction.
There are generally 5-6 stages of construction. They include ‘slab’, ‘frame’, ‘lock up’, ‘fit-out’ and ‘completion’.
Prior to first drawdown, building loans generally require council/accredited body approved plans, the fully completed & signed HIA contract , warranty & works insurance.
The lender completes an initial valuation on a ‘to be erected’ basis to ensure the total value of land & building is sufficient on completion to cover the amount of finance required.
Prior to the final progress payment a lender would request a copy of an occupancy certificate to confirm the home is habitable. They would then request a final valuation armed with that certificate.
A lender allows a borrower to pay interest only on the drawn down amount of the staged construction , which helps the borrower’s cash flow , particularly if they are juggling the payment of rent at the same time. Once the borrower has moved into the home & rent ceases, the loan can be converted to principal & interest payments.
Usually you have a choice between a project builder & a custom builder. Project homes can be generally cheaper but have limitations with designs & may not suit the block on which the dwelling is to be constructed.
Always seek legal advice on the H.I.A. building contract before signing it . There can be hidden or unfair clauses inserted in them, or even penalty clauses for late progress payments.
Make sure the builder’s warranty & works insurance (covering incompletion/defective work/builder bankruptcy etc) is in place before construction commences .
It is advisable wherever possible to make sure the builder’s contract covers the whole construction in what is referred to as a ‘turn-key’ position. Exclusions in a build can then mean significant extra finishing costs. Examples can be path ways, clothesline, fencing, light fittings etc.
Lastly the builder on your behalf, will generally deal with the approving body (council or otherwise) in relation to the building plans. This can be important because they have experience in understanding development regulations, local zoning & building policies.
COMPASS lending & finance have solid long term experience in construction finance. Please give us a call on 65832211.