Building a new home can be an exciting opportunity to create a property around your needs, but arranging finance for a construction project involves considerations that can differ from buying an established home. Progressive drawdowns, building documentation, project costs and potential variations can all influence how the finance process unfolds.
For Western Australians planning a new build, understanding these considerations before construction begins can make it easier to prepare financially and have more informed conversations about available lending options. FinanceCorp provides credit assistance to consumers considering construction loans and other property finance solutions, with brokers who gather information about a consumer's requirements, objectives and financial situation before explaining and comparing available options from the relevant lender panel.
How Construction Loans Work
One of the main differences between construction finance and finance for an established property is how the funds may be provided.
Rather than making the entire loan amount available at settlement, a construction loan may involve progressive drawdowns. Funds can be released at agreed stages as construction progresses, subject to the requirements of the relevant lender and loan arrangement.
The precise process can vary. Different lenders may have different requirements regarding construction stages, documentation, inspections, valuations and the release of funds.
For borrowers, understanding these arrangements before construction starts can help with planning. It also provides an opportunity to understand how the finance process will interact with the building schedule and the builder's payment requirements.
Start With the Full Project Cost
A construction budget should extend beyond the headline price of the building contract.
Depending on the project, borrowers may need to account for the cost of land, site preparation, professional services, approvals, fixtures, landscaping, external works and other expenses. Some of these costs may fall outside the initial building contract, so understanding what is included and excluded is important.
This broader view can help prospective builders establish a more realistic picture of the funds required to complete the project.
It may also be sensible to consider a financial buffer for unexpected expenses. Construction projects can encounter changes along the way, and additional lending cannot be assumed to be available if costs increase. Any further finance remains subject to the relevant lender's assessment, criteria and approval.
Understand Progressive Drawdowns
Once the project budget has been established, borrowers should look more closely at how construction funds will be accessed.
Progressive drawdowns generally involve the staged release of approved funds as the project reaches specified milestones. Depending on the lender and loan arrangement, the borrower may need to provide supporting documentation or satisfy other requirements before each release.
This means the construction finance process can involve ongoing interaction between the borrower, lender and other parties involved in the project.
Because requirements differ between lenders, borrowers should understand the specific drawdown process associated with any construction loan they are considering. Knowing what is required at each stage can make it easier to plan cash flow and communicate with the builder.
Prepare the Right Documentation
Construction finance can involve more project-specific documentation than a standard home loan application.
Depending on the lender and the circumstances, borrowers may need to provide information such as the building contract, plans, specifications, land details and construction costs. A lender may also require a valuation or other assessments as part of its lending process.
The exact requirements can vary according to the lender, borrower and proposed construction project.
Having relevant documentation organised early can help consumers understand what information is required and where additional details may be needed. FinanceCorp can assist consumers in navigating the credit-assistance process and discussing available construction lending options from the relevant lender panel.
Allow for Building Variations
Even carefully planned construction projects can change after work begins.
A homeowner may decide to upgrade fixtures, alter finishes or make other changes to the original plans. There may also be unforeseen circumstances that affect the cost or scope of the project.
Variations can have financial implications, particularly when additional costs are not included in the original building contract or finance arrangement.
For this reason, borrowers should consider how potential variations will be funded before agreeing to them. If additional borrowing is required, it should not be assumed that the lender will automatically approve an increase. Any additional lending remains subject to applicable enquiries, verification, assessment, lender criteria and approval.
Consider Your Financial Position During Construction
The period while a home is being built can create different financial demands from those that apply once construction is complete.
Depending on the borrower's circumstances, rent, existing loan repayments, household expenses and construction-related costs may overlap. Buyers should consider how these commitments fit within their overall budget throughout the building process.
The way interest and repayments are structured during construction can also depend on the lender and the particular loan arrangement. Understanding these details before proceeding can help borrowers establish more realistic expectations about their finances during the project.
Compare More Than the Interest Rate
Interest rates naturally attract attention when consumers compare construction loans, but the advertised rate is only one factor worth considering.
Loan structure, fees, repayment arrangements, drawdown procedures, fixed or variable rate options and lender requirements can all influence whether a particular loan is appropriate for a borrower's circumstances.
FinanceCorp has access to over 25 top lenders and hundreds of loan products. However, the lenders and products actually considered for an individual consumer depend on factors including broker accreditation, lender-panel access, the type of lending requested, the information provided and the consumer's circumstances.
This also means FinanceCorp does not compare every lender or loan product available in the Australian market. Any comparison is based on the lending options available through the relevant lender panel.
Consider the Professionals Involved
Construction finance is one component of a much larger building project. Depending on the circumstances, a borrower may also work with a builder, conveyancer, solicitor, accountant, property professional or other specialist.
Each professional has a different role. A finance broker can provide credit assistance and discuss available lending options, while legal, taxation, property and building professionals can provide advice within their respective areas of expertise.
Understanding these different roles can help borrowers direct questions to the appropriate professional and avoid relying on a finance discussion for advice outside the scope of credit assistance.
Questions to Ask About Construction Finance
Before applying for a construction loan, prospective builders may benefit from preparing a few practical questions.
Consider asking:
- What information and documentation will be required?
- How will the construction loan funds be released?
- Which construction stages are relevant to progressive drawdowns?
- Are inspections or other assessments required before funds are released?
- How are variations handled?
- Which project costs may need to be funded separately?
- What fees and charges may apply?
- What happens if the construction timeline changes?
- Which lenders and loan products may be considered based on my circumstances?
The answers will depend on the individual application and lender. Asking these questions early can nevertheless help borrowers understand the process before committing to major project expenses.
How FinanceCorp Can Help
For someone unfamiliar with construction lending, the relationship between the building project and the finance arrangement can seem complicated. A finance broker can provide credit assistance by helping consumers understand available lending options and the information that may be relevant to an application.
FinanceCorp provides credit assistance across construction lending and other areas of property finance. Its brokers gather information about the consumer's requirements, objectives and financial situation and may explain and compare available lending options from the relevant lender panel.
With access to over 25 top lenders and hundreds of loan products, FinanceCorp can provide consumers with an opportunity to explore lending options that may be relevant to their circumstances. The actual options considered will depend on the applicable broker's accreditations, lender-panel access, type of lending, information provided and consumer circumstances.
FinanceCorp also offers educational resources covering different areas of finance and property. These resources can give prospective borrowers a useful starting point before beginning a more detailed lending conversation.
Plan the Finance Before Breaking Ground
A construction project requires financial planning alongside decisions about land, design and building. Understanding the likely project costs, available funds, progressive drawdowns, documentation requirements and potential variations can help borrowers approach the process with clearer expectations.
At the same time, every borrower and construction project is different. Lending remains subject to the applicable lender's enquiries, verification, preliminary assessment, criteria, approval, terms and conditions.
For Western Australians considering a new build, FinanceCorp can provide credit assistance and discuss available construction lending options based on the consumer's circumstances. Starting the finance conversation before construction begins can help prospective builders understand the process, prepare relevant information and explore available options before making significant financial commitments.
Important Information: This article provides general information for educational purposes only. It does not take into account your objectives, financial situation, needs or borrowing requirements. It is not a recommendation to apply for any particular loan, lender or credit arrangement.
FinanceCorp provides credit assistance under Australian Credit Licence 395037. The lenders and products considered depend on broker accreditation, lender-panel access, the type of lending requested, the information provided and the consumer’s circumstances. FinanceCorp does not compare every lender or loan product in the market.
All lending is subject to applicable enquiries, verification, preliminary assessment, lender criteria, approval, terms, conditions, fees and charges. Seek assistance from appropriately qualified financial, legal, taxation, property or credit professionals where required.
