A construction loan, also referred to as a home build mortgage, is a type of financing designed to cover the expenses associated with building a new home. The borrower and lender agree on the total construction costs, and the money is advanced in stages to the builders and suppliers as the work progresses. Typically, the interest rate is variable during the construction period, and once the home is completed, the loan converts to a fixed rate.
Some banks are more proactive in offering construction loans than others, as we will explain below. Using a mortgage broker can be a popular way to save time and secure the best deal for your home build.
Benefits of a Construction Loan
Flexibility: Construction loans offer flexibility with interest-only payments during the construction period, which results in lower payments during this time.
Convenience: You are able to make extra payments into your construction loan at any time, which reduces your loan balance and can result in paying less interest.
Payment in stages: Construction loans offer the flexibility to withdraw the loan at different stages of the building process, known as progress payments. Your progress payment schedule typically includes 5-6 stages during the construction period.
Types of Construction Loans
Turnkey: This refers to a single fixed-price contract with the builder, which outlines the completion of a property or renovation project. The property is fully prepared for living, including the completion of major landscaping features (such as fences and retaining walls), drives and pathways, and decorating tasks (such as painting and installing floor coverings).
Build Only: This refers to a single contract with a builder at a fixed price, outlining the completion of a property or renovation project to a fully livable and compliant condition. The owner may be responsible for finishing some work themselves or may have other contracts in place.
Partial Contract: A partial contract includes various sub-contracts that are managed by the customer, a project manager, or a labor-only agreement with the contractor(s). This type of contract usually applies to relocated or kit homes. In the case of kit homes and relocated homes, the lending is usually limited to the land value until the buildings are permanently attached.
Prebuilt: For prefabricated houses that are transported to your site.
It goes without saying that navigating construction loans is more complex than traditional mortgage options. This is why it’s crucial to choose the right loan product that aligns with your vision, and working with a reputable mortgage broker or home loan specialist can be the perfect solution. So, what are the benefits?
Loan Expertise – While banks offer numerous products and services, home loans are the specialty of mortgage brokers (loan specialists). This also means that construction loans are included, and our ability to translate the complexities of a lender’s policies into simple information can be invaluable.
Thorough Assessment – With multiple loan options available to New Zealand consumers, it’s difficult to determine which option is best for you. A mortgage broker (loan specialist) can sift through all the choices for construction loans and present the one that suits your needs.
Legwork Done for You – A loan specialist is familiar with the ins and outs of almost all of loan products. Using a mortgage broker or Loan Specialist offers you one point of contact, all while taking care of the paperwork so you can rest assured that the application is perfectly executed.
Free Service – Most finance brokers do not charge to help you find the loan with the most competitive rates and repayments. Instead, the lender you choose pays the Loan specialist directly, meaning there are no extra charges for using a mortgage broker’s services.
Potential Savings – The primary benefit of using a broker is typically sourcing the best possible interest rate and loan package that aligns with your circumstances. Even a 2-3% savings on a construction loan over a five-year loan term can significantly reduce your payments.
Client-Centered Service – Will a bank give you a heads-up when interest rates drop, check in with you every few months, or switch your loan conditions to more favourable options if necessary? Probably not, but mortgage brokers (loan specialists )do – they work for you, not the banks.