What is construction financing?

businessThe traditional approach to getting your own home is generally to look at the property market and see what is available. You then seek finance to help you to purchase the property of your dreams; or the one that gets you on the ladder.

However, this is not the only option. In fact with the price of property continuing to increase more and more people are looking into the idea of building their own homes.

This is a great opportunity to build the hoe you are actually dreaming of and not just purchase the only one you can afford.

But, to build a home you still need a significant amount of capital. While it is cheaper than buying a finished property the estimated cost is still $1,270.80 per square meter.

Of course you can’t get a traditional mortgage; there is no property to secure it on. That’s where FIRS like stornowaycp.com.au step in and offer construction financing.

The Basics

Construction financing simply means the loan of money to build a property instead of loaning to purchase an existing one. This is obviously a riskier prospect for the lender and results in a number of differences to a standard mortgage:

  • Loan To Value
    To mitigate the risk slightly a construction finance deal will only lend up to 80% of the build cost. Before this can be established you’ll need to locate a plot and design the house. This will allow you and the lenders to confirm the cost of building it and that the house is worth more than the build value when finished.
    They will then expect you to prove you have the 20% funds to get the projects started.
  • Funds Release
    You don’t need all the funds at the start and this is why they are not released in one go. They are usually released in 3 stages, in keeping with the main 3 stages of your house build; Foundations, main structure and the internal parts.
    A block of funds will only be released once the preceding stage has been completed and signed off.
  • Term
    Construction finance lasts for a defined term; this is usually between 6 months and 2 years. This term covers the time it will take you to build the property and then find alternative funds.
    Once the property is built you’ll be able to switch to a traditional mortgage to repay the construction finance; unless you have an alternative plan.
  • Interest Rates
    Because this type of lending is higher risk the interest rate will be higher; although you only pay interest on the funds you have taken; not the amount you’re entitled to.
    This is part of the reason why the loan term is kept short and the value of the house is established before the build starts. It will still be equity for the loan.

Anyone can apply for a construction loan but you should ensure you have everything planned first. Changing your design halfway through can be extremely difficult and add to your costs.

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