Construction loans are simply loans which are designed for borrowers who are building a home or doing renovations instead of buying a pre-existing property. They have a set of features specific to construction which are outlined in the sections below.

A construction loan works in a similar fashion to most types of loans but often has one key difference – Progressive drawdown.

When you think of the building process, it starts with the foundations then gradually builds up into the finished project. If you used a standard loan, this would generally mean you would be paying interest on the loan from the date you draw down and use the funds. However, a construction loan works differently.

Rather than receiving the full value of the loan (and paying interest on the full amount), the borrower receives it in instalments following the completion of different stages of the buildsuch as slab down (the foundations), framing, lock up (once the property can be fully secured), fit out and completion.Interest is generally charged only the amount drawn down.

There are many reasons to consider building over buying an existing property. New builds or renovations provide their owners a property which better meets their needs. Building ‘granny flats’ and other detached dwellings can add value to the property. To successfully complete your project on budget, you need a loan which matches the type of building project you are embarking on. It’s Simple Finance are a Sydney-based mobile and digital broker who can find you the right construction loan to get your project moving.

There is a different process for applying for a construction loan. Generally, the borrower needs to provide a number of additional information relating to the building project such as the building contract, insurances, and council plans and approvals.

Where it also differs is that there will be an estimation of the property following the construction work. In fact, there may be multiple valuations completed through the construction process.

Like other loans, you will need to pay a deposit (and lender’s mortgage insurance if you have a deposit of less than 5%) and pay back the loan over the approved term.

It is also important to note that some lenders will only lend if the building work is being done by a professional third party builder. However, other lenders can and do lend to owner-builders but the terms and features may be different, for example the loan may have a higher lending to valuation ration (LVR).