What is a Construction Loan?

When buying an established home, you’ll need the entire amount of the loan withdrawn at once. This is in stark contrast to buying a home that is built from scratch, as construction takes place in phases, and paying a loan for a finished house when it is actually under construction is less favourable to the borrower. For future homeowners who prefer to have their home built, they can turn to a construction loan.

With a construction loan, the loan balance is released in stages, according to how the construction process progresses. Each major phase comes with a corresponding amount, and as the next stage is reached, the next portion of the funds is released. This allows a borrower to make interest payments based only on the amount released, instead of the entire loan amount right from the start. With a construction loan, you’ll be making repayments based on the portion you have used.

In general, construction loans are broken up into five stages, which may be categorised as Slab Down, Frame Up, Brick Work Completed, Lock Up, and Final Completion. Stages may vary depending on the lender you’re working with. When construction is finished, the rest of the funds will be released to you and the loan usually reverts back into a regular home loan.