March 19, 2024 UFinancial

Understanding repayments in a construction loan

Navigating the intricacies of repayment schedules in construction loans

Understanding Construction Loans

Before delving into repayments, it’s crucial to grasp the fundamentals of construction loans. Unlike traditional mortgages used to purchase established properties, construction loans are specifically designed to finance the construction or renovation of a new home. These loans typically disburse funds in stages, known as progress payments, as the construction progresses.

 

How do construction loan repayments work?

Construction loans operate differently from traditional home loans used for purchasing established properties. Instead of borrowing the entire loan amount upfront, borrowers draw down progress payments as construction progresses, paying interest only on the funds utilised.

For instance, if you’ve been approved for an $800K loan but have only drawn down $150K for construction, you’ll only pay interest on the $150K. This means you avoid paying interest on the total loan amount while the property is still under construction. However, it’s important to note that no principal repayments are made during this period.

The process of drawing down progress payments involves invoicing by the builder and other trades as construction moves through various stages. These payments are typically divided into five or six stages, including deposit, foundation, framework, lock-up, fit-out, and completion.

While not mandatory, lenders generally prefer fixed price contracts before construction begins. This offers assurance that building costs won’t exceed the loan amount, reducing the risk of overcapitalisation. However, fixed price contracts have faced challenges due to rising building material costs, leading to unfinished builds and company closures.

Once construction is complete, the lender arranges for a final inspection by a valuer. 

The final payment is then drawn down, and the construction loan transitions into a principal and interest loan, marking the official start of the loan term.

Want to know your borrowing capacity? Find out here.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced, or republished without prior written consent. Content developed in partnership with IFPA.

Subscribe to our newsletter to read about ‘All things finance’

At UFinancial, we love talking about finance-related matters. From home loans and refinancing to financial planning, investing, and tax.

author avatar
UFinancial
Google Rating
5.0
Based on 270 reviews
js_loader

Free Investment Property Analysis

  • This field is for validation purposes and should be left unchanged.

Free Property Report

  • This field is for validation purposes and should be left unchanged.

Talk to us today

  • (e.g. 0422999222 or 0396869087)
  • This field is for validation purposes and should be left unchanged.

Download our free Property & Investment tips

Enter your details below to download

  • This field is for validation purposes and should be left unchanged.

Download our free Construction Guide

Enter your details below to download

  • This field is for validation purposes and should be left unchanged.

Download our free Refinancing tips

Enter your details below to download

  • This field is for validation purposes and should be left unchanged.

Download your property investor tax checklist

Enter your details below to download

  • This field is for validation purposes and should be left unchanged.

Download your free budget template

Enter your details below to download

  • This field is for validation purposes and should be left unchanged.

Download your tax checklist

Enter your details below to download

  • This field is for validation purposes and should be left unchanged.

Download our free Home Loan tips

Enter your details below to download

  • This field is for validation purposes and should be left unchanged.

Download our free Money Management tips

Enter your details below to download

  • This field is for validation purposes and should be left unchanged.

Refer a Friend

  • (e.g. 04222999222 or 0396869087)
  • This field is for validation purposes and should be left unchanged.

Let's talk about commercial and asset finance

"*" indicates required fields

(e.g. 0422999222 or 0396869087)
This field is for validation purposes and should be left unchanged.

Accounting & Tax

What are you interested in?

  • This field is for validation purposes and should be left unchanged.

Subscribe to our newsletter

Financial news, blog posts, special events, giveaways and promotions. – please register below.

Let's chat about your car loan options

Car loans

"*" indicates required fields

This field is for validation purposes and should be left unchanged.

Let's chat finance

Financial planning

  • This field is for validation purposes and should be left unchanged.

Let's chat about a new loan

Upgraders

  • This field is for validation purposes and should be left unchanged.

Let's chat about property investment

Property Investors

  • This field is for validation purposes and should be left unchanged.

Let's chat about your refinancing options

Refinancers

  • This field is for validation purposes and should be left unchanged.

Let's chat about a loan for your first home

First Home Buyers

  • This field is for validation purposes and should be left unchanged.