Construction loans are helpful when you want to engage a builder for structural renovations to your home or a knockdown/rebuild. Construction loans allow you to borrow against the future value of the property once it’s completed as determined by the banks externally appointed valuer. There are some important aspects to be aware of when looking for construction lending;
– You often have two options for a construction contract with a builder. Cost plus or fixed price. Cost plus outlines the basic known costs for the build, with the builder then adding their builders margin to the actual costs of the works. Other costs can also be added to this type of contract as the works progress. Fixed price confirms what the total cost of the build will be and is unlikely to vary from this cost during the build, (unless for unforeseen cost changes).
– Banks much prefer fixed price contracts as they know how much the build will cost and can approve the total loan which will be needed to complete the build with a strong degree of certainty.
– Banks can struggle with cost plus contracts as the costs can vary throughout the build and can end up being much higher than the bank/borrower originally believed. In some situations, the bank may not make the additional payments for further funds required.
– For most builds, the bank will send a valuer out to the property at each stage to confirm the build is progressing as per the contract, if it is not, the bank may not make the payment to the builder.
– In the build contract there will be a progress payment schedule. The builder will invoice the borrower who will then pass the invoice along to the bank for payment – this process takes about two – three weeks for payments to be made.
Please reach out if you need help with your construction. Tom.
Written by Tom Morison
