What you need to know about construction loans

Whether you’re completing a major renovation, knocking down an existing property and rebuilding or starting fresh, a construction loan may meet your needs.

What is a construction loan?

A construction loan gives you access to the money in your loan as ‘progress payments’ which are paid to your builder as they finish each stage of the build. By releasing the funds in stages, rather than in one lump sum upfront, you’ll only pay interest on the money as you use it.

When can you use a construction loan?

A construction loan isn’t limited to a new build – you may be able to use it for a major renovation or knock-down and rebuild so long as the work is completed by a fully licensed builder under a fixed price building contract. If you’re an owner builder, you should speak to an ANZ home loan specialist to find out if you’re eligible.

Keep in mind that there are some cases when you can’t use a construction loan, such as for ‘off-the-plan’ purchases. An ANZ Home Loan Specialist can help you to work out which loan is most suitable for you.

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How to apply for a construction loan

The application process for a construction loan is the same as for a regular home loan with a few extra requirements:

Fixed Price Building Contract

You’ll need to provide ANZ with a copy of your fixed price building contract which outlines the work the builder will complete along with a ‘progress payment schedule’ which lists the cost of the project and amounts due at each stage of the build.

An ANZ home loan specialist can help you understand your options for these items when you apply.

Valuation

As part of the application process, ANZ will organise a ‘Tentative on Completion’ valuation to work out the value of your home based on the proposed renovation or new build. ANZ may also need to complete more valuations during the build depending on the cost of your project.

If you’re at the early stages of planning and don’t have these documents yet, you may choose to apply for pre-approval to help you get a sense of your budget for the project.

Next steps before you can start building

Once you’ve been approved for a construction loan, there are a few extra documents you’ll need to provide ANZ before you can start building:

Council Approved Plans or Building Permit

You’ll generally need to provide ANZ with your Council Approved Plans or Building Permit within 6 months of loan approval. This is a key step to getting started so make sure you allow enough time for the council approval process.

Home warranty insurance

You’ll need to provide ANZ with a copy of your builder’s home warranty insurance or equivalent before building begins.

Things to consider

Your savings

If you’re planning to use your own savings to pay for any part of the build, you’ll usually need to pay this amount directly to your builder before you can start using your loan. There are some cases where you may be able to use your loan first. An ANZ home loan specialist can help you to understand your options when you apply.

First Home Owner Grant

You may be eligible for a First Home Owner Grant if this is your first home. An ANZ home loan specialist can help you understand if you may be eligible and how to apply.

Requesting progress payments

Once your construction loan is approved and you’ve provided all of the required documents, you’ll usually need to start using your loan within 6 months and finish using your loan within 24 months. You’ll be able to access your loan and request ANZ to make ‘progress payments’ to your builder by providing us with the builder’s invoice and any other documents required at each stage of the build.

Finishing the project

Before ANZ can make the final progress payment to your builder, we’ll organise for a final valuation and ask you to provide a copy of your building insurance and other documents required by your state.

Once we’ve made the final progress payment to your builder, your loan will switch from interest only to principal and interest repayments unless we’ve agreed to a longer interest only term at application. Your home loan will now function like a regular home loan and you can move in and enjoy your new home.

To sum up

• A construction loan allows you to pay the builder with ‘progress payments’.
• You’ll only pay interest on the money as you use it.
• Construction loans can be used for rebuilding and major renovations.
• As part of the application process you will need a fixed price building contract and a valuation.