Smart ways to approach Construction Loan Settlement

Building your dream home in Park Orchards is an exciting journey, but understanding construction loan settlement can feel overwhelming. Whether you're planning a new build, major home renovations, or buying off the plan, knowing how construction loan settlement works will help you make informed decisions throughout your building project.

What Makes Construction Loan Settlement Different

Unlike traditional home loans where you receive the full loan amount upfront, construction loans operate on a progressive drawdown system. This means you only receive funds as your building project reaches specific construction milestones. The settlement process happens in stages, with payments released according to your Progressive Payment Schedule.

This approach benefits you because lenders only charge interest on the amount drawn down, not the entire loan amount. So if your total loan amount is $500,000 but you've only drawn $200,000 for the foundation and framing, you'll only pay interest on that $200,000.

The Progressive Payment Process

When you access Construction Loan options from banks and lenders across Australia, you'll typically encounter a structured payment system:

1. Initial deposit - Usually paid at contract signing
2. Foundation stage - Released after concrete slab completion
3. Frame stage - Paid when the house frame is erected
4. Lock-up stage - Released when roof, windows, and external doors are installed
5. Fixing stage - Paid when plumbing, electrical, and internal fixtures are completed
6. Final payment - Released at practical completion

Each stage requires inspection and approval before funds are released to pay sub-contractors, including plumbers, electricians, and your registered builder.

Understanding Valuations and Inspections

During construction loan settlement, lenders conduct an 'as if complete' valuation at the beginning of your project. This determines the maximum loan amount based on the finished property value. Throughout the various stages of the project, inspections ensure work meets standards before releasing additional payments.

Your lender will typically charge a Progressive Drawing Fee for each inspection and payment release. This fee covers the cost of having professionals assess your building progress and ensure everything aligns with your council plans and permits.

Key Requirements for Construction Loan Settlement

Before applying for a loan, ensure you have:

• Council-approved plans and all necessary permits
• Fixed price contracts with your registered builder
• Development application approval (if required)
• Suitable land in your ideal location within your price range
• Clear understanding of council restrictions and council regulations

If you're planning to demolish existing property for a new build, factor this into your timeline and budget. Most lenders require you to commence building within a set period from the Disclosure Date, so it's crucial to make a plan that accounts for all preliminary work.

Interest Rates and Repayment Options

Construction loans typically offer interest-only repayment options during the building phase. Your interest rate may be variable during construction, then convert to your chosen rate structure once building is complete. This arrangement helps manage cash flow while you're potentially paying rent elsewhere during construction.

The streamlined application process with experienced mortgage brokers can help you compare options and find suitable terms for your situation. Whether you're looking at house & land packages or custom builds, having professional guidance ensures you understand all aspects of your loan structure.

What's Not Covered

Be aware that Out of Contract Items not included in your building contract may require additional payments. These might include landscaping, driveways, or upgrade fixtures beyond the standard inclusions. Planning for these extras prevents surprises during settlement.

If you're considering this as a home improvement loan for major renovations rather than new construction, similar principles apply, though the process may be adapted for renovation-specific requirements.

Construction loan settlement doesn't have to be complicated when you have the right support. At Craft Financial, we understand the unique challenges Park Orchards residents face when building in this sought-after area. Our team works with you through each stage, ensuring your construction loan aligns with your building timeline and financial goals.

Call one of our team or book an appointment at a time that works for you. Let's discuss how we can support your building dreams with the right construction loan solution.