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NG- Borrow up to 75% LTV
- Competitive rates
- Terms up to 24 months
- Options for all construction loans
Constructing a new building or re-developing an existing property to sell for a profit, use for your own needs, or rent out for income, can be a successful financial strategy.
Australian property is almost always in demand. However, building buildings is not cheap. Large upfront costs to cover land, materials and labour will be incurred, and meeting these costs can put a major dent in any business cashflow. Fortunately, there’s a solution to this problem – meet the Construction Loan – a purpose-built financial product that lets you fund the cost of building without demolishing your bank balance.
Construction loans, (also known as development loans), are a type of commercial mortgage used to cover the costs of building new homes and commercial premises or re-developing existing residential and commercial properties. Construction loans may also be used to buy a plot of land to build on or purchase an existing property for re-development.Â
Constructing or re-developing a property is a capital-intensive task. Large upfront costs to pay for land, planning, construction materials and labour will be incurred. These costs must be met before the property can be re-sold or used to generate income. Additionally, because the property may not exist yet, (it’s a new-build), or it will undergo significant change, (re-development), it is very difficult to secure a traditional residential or commercial mortgage to pay upfront costs. Instead, builders, businesses, and developers will use a construction loan to cover the project’s initial expenses.Â
Construction loans are always short-term, usually 12 – 18 months depending on the scope of the project, and are usually repaid when construction is complete and the property is re-sold or re-financed with a mortgage. Where the loan must also cover the initial purchase of the site or plot, the maximum amount that can be loaned is typically between 50%-60% of the purchase price of the property. Sometimes lending of up to 100% of the build costs can also be provided, as long as the total amount requested is within 60-75% of the estimated value of the project when complete.Â
Fees, interest rates and the terms and conditions of construction loans are usually agreed on a case-by-case basis, so costs can vary considerably. Funds are usually released to the borrower in stages as the project progresses. In all cases, the lender will take a legal charge over the property as security.
There are different kinds of construction loan:
Suitable for all commercial and residential projects.Â
This type of loan only covers the purchase of land or an existing building and the costs to build new or re-develop the existing property. Once the project is complete, the loan must be repaid. This can be done by either selling the property or replacing the construction loan with a traditional commercial or residential mortgage.Â
Suitable for commercial and residential projects, but mainly used for home construction.
Construction-to-Permanent loans provide funds to buy land or an existing property, plus the costs of building new or re-developing the existing premises. Once the project is complete, the loan is converted to a permanent commercial or residential mortgage. This type of financing may cost less than a construction-only loan, as the borrower only incurs one set of fees at the beginning of the project.
Suitable for residential projects.
Owner-Builder loans are for homeowners want to build a custom home themselves and they act as both builder and borrower. The loan can buy land and an existing property, plus cover the costs of construction to build new or re-develop the existing house. Due to the complexity involved with building a home, most lenders will only provide this kind of loan if the borrower is a licensed builder. The loan may be paid back when the project is complete or converted to a traditional residential mortgage.
Suitable for all commercial and residential projects.
Businesses and homeowners seeking to upgrade their property can use a renovation loan to cover costs. Small projects can often be paid for with a personal or business credit card . Larger renovations could be funded by refinancing an existing commercial or residential mortgage, or combination financing, such as a mix of asset-finance, unsecured business loan, and a construction-only loan.
The interest rate for a construction loan can range from around 4% to 12%, but varies depending on factors such as the lender, your creditworthiness, and current market conditions. Typically, construction loan interest rates are higher than those for traditional mortgages due to the increased risk related to funding a project that isn’t yet completed.
It’s important to shop around and compare offers from different lenders to find the most favourable terms. Additionally, the rate may be adjustable during the construction phase, with the possibility of converting to a fixed rate once the project is completed.
Interest on a construction loan is typically calculated on the amount of money that has been drawn or disbursed, not on the total loan amount.
As construction progresses and funds are used, interest accrues only on the disbursed amount. This is known as a “draw schedule,” where the lender releases funds in stages as work is completed. Borrowers usually make interest-only payments during the construction phase and once construction is completed, the loan often converts to a traditional mortgage, where regular principal and interest payments begin.
Construction loans can be used to pay for:
The amount you can borrow with a construction loan depends on several factors, including the lender’s policies, your creditworthiness, the project’s scope, and the estimated value of the completed property. Typically, lenders will finance a percentage of the project’s total cost, often ranging from 75% to 90%, requiring you to cover the remaining portion with a down payment.
Your debt-to-income ratio, credit score, and financial stability also play a role in determining the loan amount. Additionally, the loan amount may be influenced by the type of construction project, such as residential, commercial, or industrial, and its risks.
Lenders often require detailed project plans, budgets, and timelines to assess the viability and cost of the construction. It’s important to consult with multiple lenders to understand their specific requirements and to find the best financing options for your project.
A construction loan offers several benefits for financing building projects. Primarily, it provides the necessary funds to cover construction costs, including materials and labor, with flexible draw schedules allowing you to access funds as needed.
During the construction phase, many loans offer interest-only payment options, which keep payments lower until the project is completed. Additionally, some construction loans can convert into a permanent mortgage, simplifying the financing process by eliminating the need for a separate mortgage application.
Construction loans also allow for project customisation, enabling adjustments and improvements during the building process. Securing a construction loan can improve credibility with contractors and suppliers, showing you have the financial backing to complete the project.
Eligibility requirements vary from lender to lender, but most will ask the borrower for the following:
The application process for a construction loan can be lengthy and will require the borrower to submit a substantial information package. Although most construction loan requests are considered on a case-by-case basis, the basic application process is the same for all projects:
Finding the best construction loan for your business and going through the application process can be a lengthy, costly, and time-consuming process. Whereas individual lenders may only have a limited suite of loan options, using a broker such as Swoop can give you access to multiple lenders with just one application. The broker route can also save you time and money, provide the largest choice of loan products, and give you the most competitive rates and fees.
Constructing a new building or re-developing an existing property can be challenging enough. The last thing you need is a difficult loan application process too. Take the headache out of securing the best construction loan for your business. Contact Swoop today to start building your next big thing.
Swoop was amazing! I was looking for refinancing and they were straight onto finding me the best possible option. I would highly recommend them.
Owner, F45 Cambridge
Written by
Chris is a freelance copywriter and content creator. He has been active in the marketing, advertising, and publishing industries for more than twenty-five years. Writing for Barclays Bank, Metro Bank, Wells Fargo, ABN Amro, Quidco, Legal and General, Inshur Zego, AIG, Met Life, State Farm, Direct Line, insurers and pension funds, his words have appeared online and in print to inform, entertain and explain the complex world of consumer and business finance and insurance.
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