You know what construction loans
are and how they can help you navigate cashflow
challenges of big projects; it's time to understand progressive drawdown.
By allowing you to draw on your construction loan bit by bit as needed – known as ‘progressive drawdown’ – your interest payments are lower than if you borrowed the whole amount upfront.
A progressive drawdown – or progress payment – is the portion of your loan funds released at each stage of construction.
If you’re using a registered builder, your lender will pay them direct at each stage of the build (assuming you’ve met their requirements).
Among other things, your lender will need to see the builder’s invoices as well as a progress claim certificate.
If you’re an owner-builder, the lender will release the funds to you when they get itemised invoices and receipts – and provided you meet other requirements. They will need these at each completed building stage.
Importantly, they must match up with progressive payment schedule agreed to when they approved the loan.
A construction loan is a standard home loan – with additional building conditions.
So what’s the difference?
Let’s look at two $500,000 loans – one standard, one construction – to see how it works.
If you have a standard home loan – without building conditions – you must draw down the total loan by a certain time.
The full $500,000.
That means you’re paying interest on the whole loan amount – all $500,000 – from the start.
But if you have a construction loan for $500,000, then you draw down what you need in installments, to cover the costs of each part of the project.
If your first invoice from the builder is for, say, $50,000, then that’s what you draw down.
That’s what you pay interest on.
You only pay interest on the rest when you draw it down later in the project.
But remember you'll also pay loan interest on any fees and charges debited to your loan account.
Your lender will need the paperwork in order (all invoices etc.) before they release each progress payment
INSPECTIONS AND VALUATIONS?
Before you start building, your lender will need an ‘as if complete’ valuation – an estimate of the market value of the land and proposed building/renovation.
They will also require further inspections and valuations through the project to be sure everything’s on track and within budget.
COST OVERRUNS
Before you start building, your lender will need an ‘as if complete’ valuation – an estimate of the market value of the land and proposed building/renovation.
They also require further inspections and valuations through the project to be sure everything’s on track and within budget.
Once the interest-only period of your loan ends, your loan becomes principal and interest.
If you finish building before then, you can change the loan over to principal and interest.
Do you need a construction loan?
Contact us @ propertyloans@realrenta.com and we will arrange for a lending specialist to contact you shortly.
Marlene Liontis
Monday, 11 March 2019
