Construction loans typically have a higher interest rate than standard home loans. Their interest rates tend to be higher because your lender doesn’t have an actual asset to secure the loan, just an asset that’s expected to exist. In addition, it can be difficult for a lender to value the property because neighbourhood property values could change, or the builder could do a shoddy job. So to offset this risk, lenders assign higher interest rates to construction loans. Currently, the average construction loan interest rate is hovering around 2.5%.
What is a construction loan?
A construction loan is when you borrow money to build an owner-occupied home or investment property. You can also use them to pay for significant renovations to existing properties. Construction loans aren’t paid in a lump sum format. Instead, they are draw-down loans divided into stages. After each phase of construction is completed, your lender releases the funds directly to your contractor.
How do I get approved for a construction loan?
When you apply for a construction loan, you will need to provide the following:
- A budget: this means providing financial documents, assets, and liabilities, as well as a detailed plan outlining how you will manage to afford your repayments during construction
- A detailed construction plan: your lender will need the builder’s qualifications, exact specifications for your property, the materials they will use, the timetable, and how much they estimate the project will cost.
- A deposit: to start construction, you may need a deposit of 5%.
- A good credit rating
If you need a construction loan, Mortgage House can help. As a non-bank lender, we can offer competitive interest rates on all our loan products.
