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How it works.
Then we apply to the bank for a loan as per usual, based on the amount you have available to contribute to the overall purchase price. The bank will assess your loan application based on land price plus the construction contract price, or the ‘on-completion’ value provided by the valuer, whichever is lower.
Eventually your builder will be ready to receive payments from the bank for the work they’ve completed in stages. They’ll issue the invoices to you at each stage. At this point you’ll sign and send that invoice to the bank to get paid. This will happen 4-7 times all the way through to the final stage when keys are handed over.
Are construction loans really that complicated?
They can be complicated, if one is not educated and prepared. Building a home can be a complicated process that involves contractors, council, builders, banks, solicitors, accountants, quantity surveyors, etc. As with anything that has this many people involved, there’s always the possibility of a communication breakdown or for something to not go as planned.
Unlike conventional loans where once they’re settled then it’s easy to wipe your hands from it and move on, getting approved and settling a building loan is only half the battle. The other half of the battle comes after the loan is settled and building preparations commence. From there we have to handle the full progressive drawn down payments and building inspections and ensure everything is handled between the builder and bank in a timely manner. Too often some brokers and bank employees don’t fully understand the in’s and out’s of this process and it could end up causing costly mistakes and delays.
We have a Build Process & Cost Guide that might help you out if you’re interested.
Manage your expectations
Conventional loans are pretty straightforward for any bank to handle. Construction loans, not so much.
For a construction loan, depending on the bank, the internal system for handling construction loans is often poorly-operated and run by inexperienced or indifferent staff within the banks. There are a lot more details to get right and therefore more ways for mistakes to be made.
A good mortgage broker can do a lot to prevent these issues from ever arising, but often some things are just out of our control. Even still, it’s our job to get involved and see what can be done to fix these issues as they arise.
Be warned… whichever lender you apply with, be prepared to practice patience.
what’s the process to have the bank pay your builder directly?
- First, the builder will send you an invoice.
- Then, you should already have drawdown request forms from your lender, complete this form.
- Send the drawdown request form and the invoice to your mortgage broker or the construction team of your lender.
- Some lenders at this point require a valuation to confirm satisfactory work has been completed so far.
- Once lenders are happy with the work done so far, the next stage of funds will be paid to your builder usually within five working days.
- Finally, you’ll repeat this process for each progress payment required by the builder.