Browse Forums Home Finance 1 Aug 09, 2011 5:34 pm HI All, My wife and I are awaiting the settlment of a block of land we've purchased. We plan on building a new home on the block but are in two minds as to whether we should take out a construction loan or a normal home loan. Speaking to the bank, they have given us two different answers (two different consultants). We have enough savings to pay off the land. Scenario 1 would be to pay off the land and take out a construction loan for the build. Scenario 2 would be to take out a loan for the land with a 100% offset. We would use part of our savings to pay for the land and take out a mortage for the part. We would then park the remainder of our savings in the offset and draw on the savings to pay for the build. From what I can tell, scenario 2 means we are in control of the funds being released to the builder and we won't need to rely on the bank and their paperwork/process at each payment stage. Scenario 1 however may be safer as the bank needs to approve the stages before releasing of funds and I guess they might be more stringent on this than what we would be? Has anyone been in a similar situation? Re: Construction Loan or Not?... 2Aug 09, 2011 8:18 pm Keep it simple! Go for scenario #2. Banks are conservative when releasing funds during construction, however in most cases they are reasonable. It doesn't protect you, but it does slow down everything! If you have control then that is way better. A word of warning... do not run out of money during construction. If you go to the bank and ask for a loan then most will decline it because they only lend at the beginning of the project or at the end, not during. A couple of lenders can help with a half finished property however your choices will be limited and you may find the process quite stressful. The main checks that a bank does are to ensure that your builder has the proper insurances, a license, that there is council approval and that the final value stacks up to their lending requirements. Ideally you should be doing these checks or know this yourself anyway. Good luck with your job. Re: Construction Loan or Not?... 3Aug 11, 2011 3:47 pm I was in exactly the same situation and was told scenario 2 by my sister in law who is a loans manager at which bank. However in hindsight it was the worse scenario we could have chosen as the builder views it as a "cash sale". As a result the builder wanted us to pay any post contract variations and post slab progress payment upfront for security. This meant we paid money much earlier than we needed to because we were redrawing (we had $400k in redraw) on an existing loan which had been topped up by $50k (for landscaping) Of course all builders are different but read your contract very carefully when it comes to funds before financing your loan. The easiest way is not always the best way.......IN hindsight I wish we had gone for a construction loan Hope this gives another perspective PS We had no problems getting an extra $50k during construction for landscaping so it is possible, we are with Commonwealth. Re: Construction Loan or Not?... 4Aug 11, 2011 8:32 pm Hi Kan, It is easy to get more funds if you have plenty of equity, however if your loan involves LMI or you no longer meet the LVR requirements of your lender it is often impossible. For everyone in between it is very hit and miss. Trust me you never want to risk the bank not being there with the money when you have a half built house! Re: Construction Loan or Not?... 5Aug 12, 2011 11:21 am Hi thanks for the replies. As this will be the first time going through the build process, I'm not sure what is involved with the release of monies at the end of each stage. I thought by going down the construction loan path, the bank would have more formal processes in place and would require the builder to be on the ball with their works before releasing funds.. i.e. the builder would not be able to demand for early payment before all works for stage have been done. Seems like going down the path of paying for the build with our savings, the builder may have some room to demand for early payment and take advantage of the situation. We are going with a volume builder so not sure if that makes a diference. Re: Construction Loan or Not?... 6Aug 26, 2011 5:48 pm tmv Hi thanks for the replies. We are going with a volume builder so not sure if that makes a diference. Ours was with a volume builder I will PM you The biggest challenge will be if you take out a loan and then run out of money - you'll have an incomplete security and lenders do not like this so you can get stuck.… 2 13526 Hi, you've probably already resolved this, however, Commbank will probably pay the funds to you after you send evidence the work is done regardless the change in the quotes. 1 31784 How much are you ahead in payments compared to where the build is at? Have you fully drawn down the loan? 5 9178 |