The ins and outs of construction loans
- Thread starter yadreamin
- Start date
I assume we're talking about residential construction here.
Most people start with some land against which they'll have a loan. When they want to build, they apply for a construction loan which suppliments the land loan.
In most cases, the property is valued based on the cost of the land, plus the cost of the construction under a fixed price building contract.
Residential construction contracts usually state 5 stages through the normal process of the construction.
* Base (slab is poured)
* Frame (house frame is completed)
* Lock-up (externale wall cladding and roof covering, doors, and external windows)
* Fixing (internal architraves, skirting, doors, shelves, baths, cabinets, cupboards, etc)
* Completion (everything else in the contract, usually to the standards where a certificate of occupancy is issued)
Builders usually send an invoice at each of these stages. The purchaser pays the first 5%-20% (depending on the LVR of the loan, you pay your part first), after that the bank pays the rest.
The loan is drawn down as the bank makes their contribution of the payments, until the entire loan is drawn when the 'completion' invoice is paid. The customer only makes repayments based on the amount of money drawn down at a given time. In most cases, the repayment schedule is interest only during the construction period, after which it may become P&I depending on the nature of the loan.
The bank may require an additional valuation before paying the 'completion' invoice to ensure that everything is done as per the construction contract. They may also require a copy of the certificate of occupancy.
Most people start with some land against which they'll have a loan. When they want to build, they apply for a construction loan which suppliments the land loan.
In most cases, the property is valued based on the cost of the land, plus the cost of the construction under a fixed price building contract.
Residential construction contracts usually state 5 stages through the normal process of the construction.
* Base (slab is poured)
* Frame (house frame is completed)
* Lock-up (externale wall cladding and roof covering, doors, and external windows)
* Fixing (internal architraves, skirting, doors, shelves, baths, cabinets, cupboards, etc)
* Completion (everything else in the contract, usually to the standards where a certificate of occupancy is issued)
Builders usually send an invoice at each of these stages. The purchaser pays the first 5%-20% (depending on the LVR of the loan, you pay your part first), after that the bank pays the rest.
The loan is drawn down as the bank makes their contribution of the payments, until the entire loan is drawn when the 'completion' invoice is paid. The customer only makes repayments based on the amount of money drawn down at a given time. In most cases, the repayment schedule is interest only during the construction period, after which it may become P&I depending on the nature of the loan.
The bank may require an additional valuation before paying the 'completion' invoice to ensure that everything is done as per the construction contract. They may also require a copy of the certificate of occupancy.
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Many lenders treat their constrcution area as a separate poor cousin and dont resource the area as well as they should
ta
rolf
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rolf
Thanks PT and Rolf.
PT , yes its a residential construction. I already have the land with an old house on it. You have answered my question well its just what l needed to know. Comming to and end value in this market will be the challenge.
Rolf, l am surprised that lenders treat contruction loans that way. I actually thought it would be well resourced. I quess when demand for new builds is there then the lenders will respond with apropriate staff.
cheers
PT , yes its a residential construction. I already have the land with an old house on it. You have answered my question well its just what l needed to know. Comming to and end value in this market will be the challenge.
Rolf, l am surprised that lenders treat contruction loans that way. I actually thought it would be well resourced. I quess when demand for new builds is there then the lenders will respond with apropriate staff.
cheers
I almost spilt my coffee.....laughing. From my experience most lenders prefer not to do construction as there are too many touches required, mountains of paperwork and pesky builders and councils to deal with.
I can understand why lenders don't like it.
At each of the five stages I described, there's paperwork to be done.
There's usually two loans involved, one for the land, one for the building. This requires two applications, two lots of processing, two valuations, etc.
Final signoff requires another valuation and more paperwork.
All for the same total loan if the buyer had simply purchased an established house, but double the paperwork and costs!
At each of the five stages I described, there's paperwork to be done.
There's usually two loans involved, one for the land, one for the building. This requires two applications, two lots of processing, two valuations, etc.
Final signoff requires another valuation and more paperwork.
All for the same total loan if the buyer had simply purchased an established house, but double the paperwork and costs!
I work for a major builder, in finance. I suggest the big four have a total of about 20 staff dealing with progress payment invoices. It is a nightmare.
Lost faxes, wrong calculations (which arent helped by changes to the contract after loan approval), dealing with complicated forms, which if arent filled out correctly, arent even recognised as received by the lender.
Id suggest you get either your bank manager, broker, or builder to commit to dealing with the progress payments on your behalf. It will drive you crazy trying to do it yourself.
Construction finance in general is a totally diferent beast to normal residential lending. Loans that would normally be the best fit for a client, arent applicable to construction, or involve extra fees, or involve a higher contribution.
All bank managers and bankers will tell you they understand construction loans. Belive me, they dont. Ask to see a recent construction loan client they settled. If the deal is more than 3 months old, they dont do construction. Most financiers avoid construction loans if they can, the timeframes are longer for them to get paid, they need to do a whole lot more work with the progress payments, as well as client handholding waiting for building contracts to be produced, and liase with the builder for extra documentation they dont have the hassle with for normal finance.
Lost faxes, wrong calculations (which arent helped by changes to the contract after loan approval), dealing with complicated forms, which if arent filled out correctly, arent even recognised as received by the lender.
Id suggest you get either your bank manager, broker, or builder to commit to dealing with the progress payments on your behalf. It will drive you crazy trying to do it yourself.
Construction finance in general is a totally diferent beast to normal residential lending. Loans that would normally be the best fit for a client, arent applicable to construction, or involve extra fees, or involve a higher contribution.
All bank managers and bankers will tell you they understand construction loans. Belive me, they dont. Ask to see a recent construction loan client they settled. If the deal is more than 3 months old, they dont do construction. Most financiers avoid construction loans if they can, the timeframes are longer for them to get paid, they need to do a whole lot more work with the progress payments, as well as client handholding waiting for building contracts to be produced, and liase with the builder for extra documentation they dont have the hassle with for normal finance.
I'm willing to bet that a builder's response will be that it would be it would also be good if customers didn't change their expectations, or if site surveys always came in exactly as expected.
I've had chats with lots of builders over coffee and the job they do isn't an easy one. There's conflicts in managing costs, finances, creditors and expectations. The larger builders often deliver their product at lower costs due to efficencies in size, but this also brings in additional management overheads and reduced margins.
Construction lending is a painful part of the finance industry. I wouldn't say it's particularly difficult if you've got experience working with it, but I think consumers do underestimate the extra work that goes into it at all levels.
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What a ridiculous comparison. It has nothing to do with Capitalism but everything to do with deliverate underquoting to get you in the door. Onc eyou are signed up and there are penalties to withdraw they are then free to try and get away with whateverthey want. And for people who are organised and have pre-approvals based on a so-called "quote" (and I use this term very loosely) it is very frustrating to be continually going back to the bank asking for more money.
I quote my customers on complex submissions every day and I make sure that they are accurate. Because I do this every day I know what needs to be included in my costings. I fear that so called new home sales people do not (or are not honest enough to admit the truth for fear of losign a sale). There is no way that I could present a contract to my clients for signing that have additional costs that were not outlined in a previous quote, let alone a quote that has been signed by both parties.
I understand that there will be additional costs if I request additional items. However to add costs into the contract at signing that have not been previously advised /discussed / revealed / explained is simply a rort.
We have a construction loan. Since the amount they'd lend us came up significantly short of the cost of building the house, we signed a few cubic feet worth of paperwork that quite explicitly states that any extra costs WE pay for, so we're completely screwed if they hit granite or the price of carpet quadruples this month.
Thankfully we don't have to pay a cent off this loan until the house is built, which was supposed to be finished in 3 weeks but they stuffed up and we're back to 6 again. Its a transportable so they won't pay the builder in progress payments, despite the builder being happy to take progress payments and in fact charges a small fee to NOT take progress payments. We don't pay anything until the house is fully built and connected and we're happy with it.
Funny thing is, noone told CBA we were refinancing our land loan for new construction, so the other day we got a jaunty letter from them saying "congratulations on the sale of your property, wouldn't you just love a new loan from us for X, Y or Z" instead of the one I was expecting "we're sorry to see you leave, what can we do to improve our customer service". I was also expecting a $700 exit fee not a $1055 one, but the way the CBA has treated us (most recent being I got hung up on by an extraordinarily rude woman when SHE rang ME about the refinance) I'm not at all surprised.
ANZ generally gets recommended out here and I know someone who works there so I think they'll get any future loans of ours. We only went with CBA in the first place because the house I sold last year had postcode issues. Current location doesn't.
Thankfully we don't have to pay a cent off this loan until the house is built, which was supposed to be finished in 3 weeks but they stuffed up and we're back to 6 again. Its a transportable so they won't pay the builder in progress payments, despite the builder being happy to take progress payments and in fact charges a small fee to NOT take progress payments. We don't pay anything until the house is fully built and connected and we're happy with it.
Funny thing is, noone told CBA we were refinancing our land loan for new construction, so the other day we got a jaunty letter from them saying "congratulations on the sale of your property, wouldn't you just love a new loan from us for X, Y or Z" instead of the one I was expecting "we're sorry to see you leave, what can we do to improve our customer service". I was also expecting a $700 exit fee not a $1055 one, but the way the CBA has treated us (most recent being I got hung up on by an extraordinarily rude woman when SHE rang ME about the refinance) I'm not at all surprised.
ANZ generally gets recommended out here and I know someone who works there so I think they'll get any future loans of ours. We only went with CBA in the first place because the house I sold last year had postcode issues. Current location doesn't.
the builder can quote you the cost of a house, they cannot quote your other bits and pieces until you choose them, and they cant quote the cost to fit your house on the site until they have done detailed engineering and tests etc.
They are not going to waste their time giving everyone that walks in a detailed quote, which costs them money to produce, unless the client makes a commitment, usually a holding or initial deposit.
Initially some sales reps will give an estimate of site costs, however these are meaningless. The trouble is, clients wont commit until they have an idea of what the costs might be. Its further compounded when builders are slow to produce contracts, and by the time a client has a final price, the land is already unconditional, and they are stuck with it.
what I was referring to initially is the diferent ways builders quote the initial, or base price of their homes. To confuse people, just like lenders and other large competing companies, they will make it as dificult as possible to 'compare apples with apples'. One builder includes carpet, the other driveways, some charge extra for a roof etc.
Im happy to advise you further at length if you have some specific concerns with a builder if you would like to PM me.
Interesting read!
We're getting a loan from ANZ to buy a vacant land in our personal names. We intend to build 2 villas on it (sell one, keep one).
Do we have to tell ANZ now about this development? Coz, we may sell the DA approved land without actually building on it.
I just thought the initial land can be bought like a normal residential loan.
Please correct me coz I'm pretty sure I'm missing something.
Thanks.
We're getting a loan from ANZ to buy a vacant land in our personal names. We intend to build 2 villas on it (sell one, keep one).
Do we have to tell ANZ now about this development? Coz, we may sell the DA approved land without actually building on it.
I just thought the initial land can be bought like a normal residential loan.
Please correct me coz I'm pretty sure I'm missing something.
Thanks.
Better off to tell them the whole story up front. Some lenders (including ANZ) have some quirks where they don't like dual occupancy deals, depending on some circumstances.
You don't want to be put in a situation where they allow you to settle on the land, but then won't allow you to do the build later, forcing you to refinance which will cost time and money. It's best to know if they can do the whole deal upfront. If they can't, you need to take it to a lender who can.
You don't want to be put in a situation where they allow you to settle on the land, but then won't allow you to do the build later, forcing you to refinance which will cost time and money. It's best to know if they can do the whole deal upfront. If they can't, you need to take it to a lender who can.
Hi Jsoe
Id get a preapproval for the build side of it
Why ANZ ?
ta
rolf
Id get a preapproval for the build side of it
Why ANZ ?
ta
rolf
Many mainstream lenders wont lend till you have a cert of occupancy at which point they will make their one and only progress payment
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rolf
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rolf
Coz that's who we're with at the moment for our PPOR. We went to see them 2 weeks ago to refinance and take out equity with intention to buy an investment property. They did valuation free of charge in order to refinance our PPOR, as well as give us another investment loan.
We're still in search of our IP but we're getting close to one that has development potential.
Would they now force us to take out construction loan with them too? Do we have to present our feasibility study etc at this stage then? I mean we haven't even gotten our offer accepted yet. We're new to this procedure.
Every bank we spoke to refused to do a kit home. They're the ones you buy in a large box and assemble yourself, we get adverts for them in the mail all the time.
They'd all do transportables though, which the builder builds offsite and delivers. Some banks do one payment, others do installments.
I get the impression a lot of people don't know what a kit home is ...
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