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How do construction mortgages work?


Building your own home can be one of life’s most rewarding milestones. Not only does a new build have the potential to save you money, but it also gives you the opportunity to design the home you’ve always wanted with all the latest fixtures and fittings.

You can also plan your finances with confidence, knowing your new home will need little maintenance or repair for years to come.

Here’s how financing a new build differs from financing the purchase of an established home.

How do construction loans work?

Construction loans differ in structure from regular mortgage loans. Generally, progressive payments are made as the builder requires them for each stage of the project – from slab, roof and lock-up to completion.

You only pay interest on the amount you’ve already paid, keeping your repayment costs down while you’re paying to live somewhere else. Just like a regular home loan, you must pay a deposit, and depending on the amount you borrow, lenders’ mortgage insurance may apply.

If you’ve already purchased the land, you will usually require a regular mortgage for the land and a construction loan for the build. The loans can be arranged separately, but are usually bundled together, particularly with a house and land package deal offered by a developer.

Products will vary between lenders, but most lenders will allow you to refinance an existing land loan when you apply for a construction loan. Once construction is completed, you can often nominate which home loan product the construction loan will revert to (i.e. a standard variable rate loan or a fixed interest rate loan).

What else do I need to consider?

There may be government incentives available to eligible first-home buyers who build their own home. Check your state/territory’s rules here.

Before you commence your build, you should be careful to establish exactly what is covered for the price. There could be other expenses that you need to budget for. We recommend you have some contingency funds set aside in case of unforeseen expenses that may not be covered by your construction loan.

There are some drawbacks when it comes to building a property yourself, compared to buying an existing house. The construction process takes time and is subject to many factors including inclement weather, and trade and material shortages.

It’s important to go into the project with realistic expectations and the understanding that you may have to wait a while before you can move in. If you’re building in a new housing estate, it may also take some time before features like schools and shopping amenities are completed. 

Talk to us for more information

There are quite a few different construction loans on the market and each of them can be structured differently. We’re here to help you discover if building a new home is a viable option for you and help you obtain the right loan product/s for your individual needs.

Before you commence the process of building your own home, it’s wise to get advice. A short chat with us could help to take a lot of the hassle and uncertainty out of the process. Get in touch today!


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