Construction loans operate differently from traditional home loans, particularly when it comes to settlement processes. For periodontists considering building a new home or undertaking major home renovations, understanding how construction loan settlement works is crucial for successful project completion.
How Construction Loan Settlement Differs
Unlike standard home loans where you receive the full loan amount at settlement, construction loans provide funds through progressive drawdown. This means you only receive money as construction milestones are reached. The settlement process involves multiple stages rather than a single transaction, with funds released according to a Progressive Payment Schedule agreed upon at loan approval.
This approach benefits borrowers because lenders only charge interest on the amount drawn down, not the entire loan amount. During the construction phase, most borrowers opt for interest-only repayment options, which helps manage cash flow whilst the property remains uninhabitable.
Understanding Progressive Payment Schedules
Your lender will establish a Progressive Payment Schedule based on various stages of the project. Typical stages include:
• Foundation and slab completion
• Frame and roof installation
• Lock-up stage (walls, windows, doors)
• Fixing stage (plumbing, electrical, internal fit-out)
• Practical completion
Each stage requires inspection and approval before funds are released. The lender may charge a Progressive Drawing Fee for each instalment, typically ranging from $300 to $500 per draw.
Valuation Requirements
Construction loans require an 'as if complete' valuation, which estimates the property's value upon completion. This valuation determines the maximum loan amount available. The valuer considers council plans, permits, and the final specifications to provide this assessment.
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Working with Contractors and Professionals
Successful construction loan settlement requires coordination with various professionals. Your registered builder manages the overall project, whilst specialised tradespeople like plumbers and electricians complete specific components. Progress payments to these contractors align with your loan's drawdown schedule.
Ensure your builder provides detailed contracts specifying what work is included at each stage. Out of Contract Items not included in the original price can create funding gaps, so clarify these before commencing construction.
Planning Your Construction Project
Before applying for a loan, make a plan covering several key areas:
- Location and Land: Identify your ideal location and ensure suitable land is available within your price range
- Council Requirements: Research council restrictions and council regulations that may affect your build
- Timeline: Most lenders require you to commence building within a set period from the Disclosure Date, typically 12 months
- Budget: Consider whether you're pursuing a new build, major renovations, or buying off the plan
Some borrowers choose to demolish existing property before construction, whilst others build on vacant land or purchase house & land packages.
Streamlined Application Process
As a periodontist, you can access Construction Loan options from banks and lenders across Australia through a specialised mortgage broker. The application process considers your professional income stability, which often works in your favour for loan approval.
Key documentation typically includes:
• Building contracts and specifications
• Council approvals and permits
• Professional income verification
• Deposit confirmation
• Insurance arrangements
The interest rate offered depends on various factors including loan amount, deposit size, and your financial profile as a dental professional.
Alternative Options
If full construction isn't suitable, consider a home improvement loan for smaller renovations. These loans often have simpler approval processes and may not require the same level of documentation as full construction loans.
Fixed price contracts provide cost certainty, making budgeting more predictable throughout the construction process. This approach helps avoid additional payments beyond your original budget.
Development Applications and Permits
Before settlement can proceed, ensure all necessary development application approvals are obtained. Your builder typically manages this process, but delays in approvals can affect your construction timeline and loan drawdown schedule.
Council plans must be finalised and approved before most lenders will provide final loan approval. This requirement protects both you and the lender by ensuring the project meets all regulatory requirements.
Construction loan settlement involves multiple stages and careful coordination between various parties. Working with experienced professionals who understand the specific needs of dental practitioners can help ensure your project proceeds smoothly from initial application through to final completion.
Call one of our team or book an appointment at a time that works for you to discuss your construction loan requirements and explore the options available for your building project.
