Building or renovating is a great way to achieve the house you desire. You have the freedom to add quality craftsmanship and the design features that you and your family will value. Creative projects like these are both exciting and stressful.

Many new home owners and upgraders look at the benefits of purchasing a house and land package. Not only do you need the right loan features to save financially and have greater control of your project, you need the right advice on how the loan is to be considered by your lender.

There are generally two scenarios when applying for finance.
Scenario 1
You have the option to purchase a parcel of land with agreed building plans. You enter into a single contract for their purchase that settles on completion of the house and we call this a house and land package. In this instance the builder is the owner of the land.

When the lender assesses this type of contract, the loan is calculated on the value at completion and is settled in a single transaction similar to a normal house purchase. Most lenders will require council stamped plans, a fixed price building contract and a certificate of currency of the builder’s insurance policy.

Scenario 2
You have the option to purchase a parcel of land and you may or may not have building plans available at that time. You enter into a contract for the purchase of the land and a separate construction contract for the building of the house. In this instance the vendor of the land may be different to the builder.

You will need two different types of funding: the first for the land purchase and the second as a construction loan. There will be separate settlements for each. In relation to the construction loan you will be required to draw down the loan in instalments to make progress payments as significant milestones in the construction are achieved.

Understanding progress payments
Typically, a build from start to finish encompasses anywhere from three to six significant stages. These stages could include pouring the foundations, erecting the framework, roofing, lock up, fit-out and completion.

To commence the building process you will generally be required to pay
an initial deposit and then as building progresses you will be required to make additional payments as each stage is completed. These additional payments are commonly referred to as progress payments. It is important to make these payments in order for the builder to progress with the following stage.

You will most likely be paying the progress payments with funds drawn against your construction loan. Accordingly over time the amount owed under your construction loan will grow together with the interest payments associated with the loan.

Please note: Building/construction loans aren’t generally available for renovations unless they are significantly structural and with a fixed price build contract (for example adding another level or extension to your existing home). For a kitchen or bathroom renovation you would typically use your existing equity.