Guide to Construction Loans: Build and Sell
A construction loan is a specialised financial product designed to fund property development, whether building from the ground up or completing significant structural renovations. Unlike traditional home loans that provide a lump sum, construction loans release funds progressively as the project advances.
How Does a Construction Loan Work?
Construction loans function differently from standard home loans. Typically, they require interest-only repayments during the construction phase, reducing financial strain before the loan transitions into a traditional mortgage upon project completion.
Upon approval, lenders disburse funds to builders in stages through a structured process known as “progressive drawdown” or “progress payments”. These payments align with specific construction milestones to ensure funds are only released for completed work.
Construction Loan Disbursement Process
Each building contract includes a progress payment schedule, detailing construction stages and corresponding payments. While schedules may vary by builder, industry standards typically follow these phases:
Deposit: Initial payment to commence construction.
Slab/Base: Covers groundwork, site preparation, plumbing, and waterproofing.
Frame: Involves building the external structure, including roofing and windows.
Lockup: Secures the property with completed external walls, doors, and windows.
Fit-out/Fixing: Includes internal installations such as electrical work, plumbing, cabinetry, and plasterboards.
Completion: Covers final touches, including painting, fixtures, and site cleanup.
At each stage, the lender appoints a quantity surveyor to verify completion before releasing the next payment. Borrowers only pay interest on the disbursed amount, making repayments manageable during construction.
Build and Sell: Construction Loans and Pre-Sale Requirements
For developers building properties for sale, lenders often require pre-sales before approving funding. This means developers must secure buyers for a portion of the properties before construction begins to demonstrate project viability and mitigate lender risk.
Key pre-sale considerations include:
Pre-Sale Percentage: Lenders may require pre-sales covering 50% to 100% of the total project value.
Legally Binding Contracts: Buyers must sign enforceable purchase agreements.
Deposits Held in Trust: Buyer deposits must be managed per legal and lender requirements.
Stronger pre-sale commitments can result in better loan terms, as they assure lenders of demand and partial loan repayment upon completion.
Loan Repayments During Construction
During construction, repayments are usually interest-only, meaning borrowers pay interest only on the amount drawn rather than the total loan. This approach minimises financial strain until the loan transitions into a standard principal-and-interest structure upon project completion.
Borrower Contributions: Use Your Own Funds First
Lenders require borrowers to contribute their share of construction costs before loan funds are released. For instance, if a project costs $600,000 and a bank finances 80% ($480,000), the borrower must first pay the remaining 20% ($120,000). Lenders require proof of payment before continuing to fund the build.
Using Home Equity for a Construction Loan
Borrowers can use existing home equity to fund construction, provided they meet deposit and lending criteria. Similarly, land equity may be leveraged, though lender policies vary.
Need Help?
Construction loans provide essential financing for property development but require thorough planning and coordination. Understanding progress payments, pre-sale requirements for build-and-sell projects, and potential risks ensures a smoother process. Reginsun has the knowledge to assist. Whether you’re a first-time or an experienced developer, our team can guide you through the complexities of construction loans. Contact us today to discuss your financing needs and secure the best loan options for your project.
The information provided in this article is factual information only and does not constitute financial advice. Users should seek independent professional advice before making any financial decisions.