24 Aug 2023 Podcast: Q & A – All Things Construction Loans

Host Introduction: Evelyn hosts a Q&A episode on construction lending, addressing listener questions and FAQs related to construction loans, following up from a previous episode.

Key Topics Covered:

1. Differences Between Traditional Home Loans and Construction Loans:

• Traditional Home Loans: Repayments start one month after settlement when ownership is transferred.
• Construction Loans: Land loan repayments may already be active. Progress payments are made during construction; loan repayments shift to principal and interest once the property is complete. Borrowers must factor in additional living expenses like rent during the construction period.

2. Fixed vs Variable Rates for Construction Loans:

• Most banks only allow variable rates during construction.
• After completion, borrowers can choose to fix the loan.
• Some banks may offer fixed rates for construction loans, but this is less common.

3. Understanding Progress Payments:

• Builders are paid in stages, as outlined in the building contract.
• Payments reduce financial strain on builders and allow borrowers to inspect work before paying.
• Interest is charged only on the amount drawn for each stage, increasing as construction progresses.

4. Interest Calculation During Construction:

• Interest is calculated daily but debited monthly.
• Borrowers pay interest only on the funds drawn down to date.
• Upon project completion, loans transition to principal and interest repayments.

5. Bank Requirements for Construction Loans:

• Banks review: Builder reputation and whether they are blacklisted. Progress payment schedules to ensure they meet standards. Borrowers’ experience for complex projects (e.g., multi-dwellings or commercial developments). Borrowers’ serviceability for both land and construction costs.

6. Common Challenges for Borrowers:

• Time Delays: Longer construction periods can increase costs like rent or lost income.
• Underestimated Costs: Fixtures, fittings, and upgrades often exceed initial quotes.
• Valuation Issues: Land or construction valuations may fall short of contract prices, creating funding gaps.
• Additional Expenses: Some lenders require landscaping, fencing, and driveways to be complete before approving final finance.

7. Contingencies and Variations:

• Variations to the building contract after loan approval may need to be self-funded.
• Borrowers should budget for unexpected costs.

Closing Notes:

Evelyn encourages listeners to reach out with additional questions or suggestions for future topics and guests. She offers her support to anyone needing advice, even non-clients.

This episode provides practical advice for navigating the complexities of construction lending, emphasizing preparation, research, and financial contingency planning.