How does finance work when building a new home

When building a new home, finance works a little differently to your average home loan. Here’s what you can expect:

• If you need a loan to buy land this will typically be separate to the construction loan.
• When you’re ready, you’ll agree on the total construction costs with your bank and builder. At this stage, you’ll generally need detailed building plans and a schedule of construction costs to show your bank.
• Then, rather than borrowing one lump sum of money you’ll borrow in chunks to pay builders and suppliers as the construction progresses. This is called a ‘progressive drawdown’.
• You can usually stick to interest-only repayments during construction to keep costs down. This will generally be on a floating interest rate, which can then be fixed once construction is complete.

While construction loans work differently, there are a few things that are the same as a regular home loan. The bank will still need to assess your income and financial situation to ensure that you’re able to afford repayments. This can be a difficult hurdle to clear, especially if you’re still paying a mortgage on your current home during the build, so you’ll need steady employment and a solid income.

If you need help applying for a construction loan and shopping for the best deal, it’s a great idea to speak to a mortgage broker who specialises in building finance.

Building is all about controlling hundreds of variables to achieve the outcome you want - a beautiful new home.

Because there are so many variables and moving parts, and because construction materials tend to increase in price, it can be extremely difficult to avoid cost overruns during your build. To ensure you can cope with cost overruns it’s best to have a contingency fund of at least 15% of the build cost put aside, just in case.

It’s also worth checking and double checking the building contract before you get started to ensure you understand it - and having a lawyer review it as well. A good lawyer will be able to explain the contract to you, identify clauses that may not be in your favour and recommend changes. It’s particularly important to understand any clauses that cover price fluctuations.

It’s also important to get a clear idea of the construction timeline from your builder, as during this time you may be paying two mortgages. Unfortunately, it’s extremely common for construction to take longer than expected, so make sure you have the time and the funds to cope with an extra six months of building at least.