How Do Home Construction Loans Work?

How Do Home Construction Loans Work?

Building your own dream house is a mixed feeling of excitement and stress. Unless you have plenty of cash at your disposal, looking for the best home construction loans is another thing that you need to look into.

With all the different loan products out there in the market, finding the right one to meet your needs can be a daunting task. Without proper strategy, this entire process of loan applications can easily overwhelm some people.

What are construction loans for?

Home construction loans are examples of loans individuals who are looking for loans to finance their project. Unlike personal loans, these types of loans are given in different arrangements and in different stages of the home construction projects. Generally the loan comes in two parts and five stages.Part one is purchasing the land and securing a builder and house design. Part two are the staged payments made by the bank to the builder described below.

READ MORE: Early Access To Super To Keep Up With Home Loan Repayments

Anyone could apply for this loan to build the base of the house (slab down or base), for fittings and fixing fixtures, or to finance the completion of your home construction. The loan amount is usually based on the projected cost of the construction phase and the payouts in a progressive drawdown.

Do your homework

Before anything else, applying for any loan products demands a lot of time from the borrowers. From searching for the specific loan product and understanding the individual pros and cons of each lender to compiling all the documents can eat up precious time from the borrowers. But this early phase is a crucial one and can determine the future success of this loan application, and in fact the whole project..

Another important preliminary thing that borrowers need to prepare is the deposit or the amount the borrower is ready to shell out for the loan. According to MoneySmart, borrowers should at least prepare 20% of the entire loan amount for deposit to avoid paying the lender’s mortgage insurance.

Have more options

Looking at one potential lender, though sounds efficient and time-saving, can have a drawback to anyone who’s looking for the most competitive rates. Borrowers should at least be considering two potential lenders to have enough choices to choose from in the end.
There are plenty of lenders in Australia that offer all sorts of loan products. But having plenty of options can sometimes overwhelm people too on what to choose over the other. Probably two of the most helpful measures of a good home loan or any other loan are the interest rates and loan terms.

READ MORE: A Quick Guide To Getting Construction Loans

Beware with loan sharks

Loan sharks are all over the Internet offering home loans or owner builder loans at very attractive rates that are too good to be true. These unscrupulous operators are mostly taking advantage of the poor situations of borrowers, especially those with bad credit ratings.

It is not uncommon for borrowers with bad credit scores to fall victim to loan sharks or individuals doing predatory loan practices. These borrowers erroneously think that because of their unfavorable credit score, it is impossible for them to get loan approval at a reasonable rate.

It is worth noting that you should only work with lenders that don’t take advantage of your situation. You can do this by dealing only with an experienced and licenced broker that practices ethically and puts the welfare of their clients before theirs.

Intellichoice is a broking company offering services to borrowers looking for loan products. They specialised in home loans, personal loans, and owner builder loans. They’ve worked with thousands of borrowers all over Australia over the past 18 years.


Darin Hindmarsh is the founder and CEO of Intellichoice Finance, a broking firm based in Brisbane. He's been providing financial and broking services in the past 18 years. Hindmarsh is also finalist in the 2020 Australian Mortgage Awards - Pepper Money Broker of the Year – Specialist Lending. To jumpstart your home loan application, visit their home loan online application page today.!