A construction loan is a lending option for people involved in the renovation or rebuilding of a home. Whether it’s a standalone construction loan or a standard home loan with a construction component built in, the construction loan is designed to help with major renovations or building new homes.
Usually, with a standard home loan, you will receive a lump sum of the loan amount at settlement. However, unlike standard home loans, construction loans are paid out at different stages of the renovation or build.
Each payment made is called a draw down. Interest paid is calculated per draw down amount so if your total loan is $500,000 but your draw down is $100,000, you’ll only pay interest on the $100,000 until further draw downs are made.
One great thing about construction loans in particular is that repayments are interest only during the construction period. This is an appealing option because it minimises stress and risk to renovators and home builders.
Lower repayments
Construction and renovation can be unpredictable and tricky. Given the amount of stress involved already, the last thing you want to think about is whether or not you’re making your loan payments.
Construction loan payments are interest only during the construction period, allowing you to deal with one thing at a time and helping your cash flow while the work is being carried out. This can be helpful for the renovations themselves, or for living expenses if you’re staying at a temporary property during the process.
Lower interest
You won’t be charged interest on the entirety of the approved loan amount only the draw down. If you don’t end up using the full loan, you don’t pay interest on the full loan.
Once construction is complete, your loan may either revert to interest only or principal and interest. It depends on your loan and lender.
Security
Rather than giving the builder a lump sum upfront, progress payments mean that borrowers and lenders only pay for work that’s already been done (and done properly). It’s a clean and logical way to pay for renovations or home construction.
Mortgage House
At Mortgage House, we’re no strangers to the homeowner’s journey. It’s a long (but rewarding) one.
But don’t worry, we can help with that.
If you’re thinking of upgrading or renovating your home, you can contact us for advice about the best options for you when it comes to your loan. The cost of your loan can drastically affect your financial planning, so it pays to speak to the experts about it.
