How do construction loan works?

Construction loan usually works in progressive draw down arraangement by the lender. When construction starts, builder divides the whole building process into five stages. Bank will release the fund only when particlar stage is completed. For example, if stage 1 - base is 10% of the total build loan amount (eg $600,000). when stage 1 completed, 10% of $600,000 = $60,000 will released to the builder. Then the builder can continue on next stage and follows the same process as stage 1. Please note that in the buiding stage, the loan repayment starts to increase as building stage completed and progress along. Most borrowers choose interest only repayment to reduce the repayment amount and switch back to principle and interest repayment when the build is fully completed. If you are looking to build and unsure what to do, we are happy to explain and assist in home loan application.

Hi there, Not all lenders will do construction loans. The ones that do all have a slightly different way of doing them. In general, the loan will be split into 5 stages (base frame, lock-up, fixings and practical completion). In general (not all lenders do Interest Only for construction) each time the builder finishes a stage, they will send you (the owner) an invoice to be paid by the lender. You would sign it and send it to the lender (or your broker) along with the completed progress claim form (supplied by your lender or broker) which will be processed and then paid to the builder. Once each stage has been paid you will start making interest only payments (with most lenders) for the invoiced amount only. As the build progresses, your repayments will increase as each stage is finished and at the completion of the build when you have the occupancy certificate your repayments will convert to principal & interest. There are many slight differences in the process with each lender but that is a very basic explanation of how a construction loan would work. Hope that helps.