Borrowing to build your dream home

Looking to borrow to build your dream home on your own piece of paradise? It could be worth thinking about a construction loan. But what are construction loans, how do they differ from regular home loans and what should you know before you decide what the best option is for you?

Let’s take a look at the nuts and bolts...

The basics

A construction loan can be used to build a new home from scratch or to carry out major structural renovations to an existing property. Unlike a loan that you might take out to buy an existing home, a construction loan has a different structure, with progress payments released to your builder as each stage of construction is completed.

During the construction phase, you will make interest only payments on the outstanding balance of your loan. So, if you’ve drawn down $200,000 of a $400,000 construction loan, you’ll only pay interest on $200,000. Once the construction phase of your build is complete, your repayments will switch to principal and interest repayments.

Construction and payment stages

Progress payments are usually released by the lender in line with each construction phase:

• Deposit - payment of the builder’s deposit to commence your home build.
• Slab - the foundation slab has been poured.
• Frame - the exterior frame or walls are in place.
• Lock up - the external doors and windows are all in place.
• Fit-out - your internal fittings and fixtures are installed.
• Completion - construction is finished.

The pros and cons of a construction loan

Before you decide whether a construction loan could be right for you, let’s take a look at some of the pros and cons.

Pros

• Paying less interest: During construction, you’ll be only charged interest on the amount you’ve drawn down, not on the total loan amount. Potential interest savings is a big tick in the pros column.
• Protection from financial loss: A construction loan can help protect you from financial loss due to shoddy workmanship or construction errors because progress payments are only paid to your builder once each stage of construction has been completed to a satisfactory standard.
• Flexibility to make extra repayments: Most lenders will let you make additional payments which means you could pay down your loan faster and pay less interest on the loan overall.

Cons

• Larger deposit: Construction loans often require a higher initial deposit since borrowing to build is usually considered to be more of a risk than borrowing to buy an existing home.
• Progress payments: Your lender will need to assess the work that’s been carried out at each stage of construction before they release payment which can add a little extra time to the process.
• More complicated: A construction loan isn’t as straightforward as a regular home loan so the application and other paperwork along the way can be more time-consuming to work through.

Can I borrow to build with Teachers Mutual Bank?

You sure can! Subject to loan approval, we’d love to help you get your dream home off the ground and we’ve got just the loans to help you do it. Our Your Way home loans can be used as construction loans and offer lots of other great features and benefits too:

• Competitive fixed and variable rate options
• Free redraw (for variable loans)
• Unlimited additional repayments on variable loans
• Ability to split your loan
• Great package benefits + discounts exclusively for essential workers with Your Way Plus. 

Find out more here

Need some guidance?

Our Lending Specialists are here to help you weigh up your options to find the best home loan for your situation, not someone else’s.

If you’re ready to get your dream home off the ground sooner rather than later, or you just want to talk through your loan options, you can make a booking to talk to a Lending Specialist either at home (Covid-depending), on the phone, or on a video call.

Book a call back