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4 reasons to consider a construction loan

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There are plenty of reasons to build your own home. Whether you’ve always dreamed about building a family home or simply can’t find a property on the market that fits the bill, choosing to build a home is an exciting life milestone. Still, many would-be home builders are concerned with the costs of building a home and are unsure of their funding options.

To explain how you could fund your home building project with a home construction loan, we’ve teamed up with the finance experts at savings.com.au. From stamp duty savings to reduced interest payments, read on to learn how a construction loan can help you turn your dream home into a reality.

1. Save on stamp duty

One of the biggest expenses involved in buying a new home is stamp duty (also known as ‘transfer duty’), a tax levied on all home buyers by their relevant state or territory government. The exact amount of stamp duty you pay varies between states, but in NSW for example, if you buy a property valued at $304,001 to $1,013,000, you’ll pay $9,112 plus $4.50 for every $100 over $304,000. Depending on the cost of your house, this could amount to a significant sum.

On the other hand, if you take out a construction loan on a vacant parcel of land, stamp duty is only paid on the land, and not on the home itself. This means that if you buy a block of land for $350,000 and build a home valued at $500,000 on this land, you only pay stamp duty on the $350, 000 land purchase.

2. Lock in a fixed rate mortgage

For many current and prospective homeowners, the idea of a fixed rate mortgage has obvious appeal. Unlike other mortgages, this type of mortgage allows you to ‘lock in’ your interest rate to protect yourself from future rate hikes. With Australian interest rates currently at record lows, you may wish to consider locking your rate in soon, before they rise again.

Although most banks and lenders offer fixed rate mortgage options, not all of them allow you to fix your interest rate while building a home. For this reason, it’s important to shop around and do your research to find lenders who do offer fixed rate construction loans and learn whether you could be eligible.

3. Reduced interest payments

Because home construction loans use a progressive, drawdown payment method, you only incur interest on the amount used to pay for the construction so far, rather than on the full loan amount. In short, this means that your overall loan costs could be significantly smaller.

To understand how this works, consider two $600,000 loans: A standard home loan and a construction loan. WIth a standard variable home loan, you’ll be required to pay interest on the full $600,000 amount from the first day of repayments.

With a construction loan, on the other hand, you’ll only pay interest on the cost of the stage of construction that you’re currently at. For example, if your home builder charges $100,000 for laying the foundations of your home, you will only be charged interest on this $100,000 for the duration of that stage of construction. If the second stage of construction costs a further $100,000, you’ll then make repayments based on the interest costs of $200,000. 

This drawdown payment structure can ultimately save you a significant amount of money on interest during the construction period. Importantly, it also means that if things fall through and you are unable to complete construction, you will not have to pay interest on the unfinished build.

4. Start with interest-only payments

Payment on most construction loans starts with interest-only repayments on the amount that you’ve drawn down. This is intended to ensure that you don’t exceed the construction costs that you’ve budgeted for in the crucial early stages of building your house.

While this can be a huge cost saving, bear in mind that this is only temporary: A construction loan will generally only be interest-only for the first 12 months before reverting to a standard principal and interest loan.

Fund your dream home with a construction loan

Securing the finances for building your home can be challenging, but with some research, planning, and foresight, it’s not impossible. Building your own home is a rewarding experience that will not only give you and your family a beautiful place to live, but also provide you with an asset that will only appreciate in value.

To learn more about construction loans and other financing options, visit Savings.com.au. Then, explore our home designs and get in touch to start your home building journey today!