Each lender will adopt different policy for a construction loan, the following information is a general outline for most lender, please consult your broker whether this is the right loan for you before committing to a loan contract. Most lender will look to provide finance to construct residential buildings where the construction is underpinned by a fixed price contract with a registered builder. Building on a ‘cost plus’ or other basis will not be considered. The following rules applies to most construction loans:
A formal valuation is required initially with an ‘as is’ and ‘on completion’ value.
The borrower is to contribute their own funds at the initial settlement stage before any loan funds are drawn. Client is to be advised of this at approval.
Release of funds against unimproved vacant land (prior to construction) must not exceed the approved LVR of the application.
Buildings under construction are to be covered by insurance and evidence of the cover noting The lender interest as First Mortgagee is to be held.
This policy must be obtained before settlement.
Exception - where there is delay between funding of the land acquisition and the commencement of construction. It is the responsibility of the submitting/processing officer to obtain evidence in these instances.
Construction is to be completed within 12 months from the first draw down.
The LVR after a release of a progress payment is not to exceed the approved LVR %.
Certificate of Currency, Certificate of Occupancy and final valuation confirming all works contracted have been completed by the builder are required prior to the last draw down.
At final drawdown, the loan will be transferred to an applicable Interest only product for the remainder of the initial 12 months Interest only period and upon expiry will then be transferred to P&I.
Fixed Price Contract for construction loan Fixed price construction loans are where a builder is contracted to build and complete the dwelling. The contract will be noted on a standard HIA approved contract. Applicant is to provide the following additional documents for construction loans with fixed price contracts:
An executed copy of the building contract.
A copy of council approved plans and specifications – Required prior to first progress payment.
The only exception to not obtaining these documents is in the instance where there is significant time between the settlement of the land component and entering into a contract with a builder. Rules around the building progress and loan payments Progress of payments: To be made in line with the schedule of payments within the fixed price contract. If Council Approved Plans were not provided for initial ‘As if Complete’ valuation then ‘Progress’ valuation to be noted that “Council Approved Plans have been received and verified they are in accordance with the draft construction documents supplied and relied upon in the construction ‘As If Complete’ valuation. If the valuer notifies that the build progress does not match the initial TBE report the ValFirm will advise and request authorisation to amend original ‘As If Complete’ valuation and then subsequently issue the ‘Progress’ valuation. Any variation from the original ‘As If Complete’ valuation will require the loan to be re-assessed by the original lender/underwriter to confirm that changes do not affect the approved loan. Variations are:
LVR increases to above 80%
Variance between valuations of greater than 5%
To be authorised by the borrower(s) stating that the work has been completed and is to a satisfactory standard of quality. The borrower must have the capacity to inspect, or may delegate to a suitably qualified expert (such as a valuer or quantity surveyor).
External progress payment inspections are to be undertaken in the following circumstances: For Fixed price contract under $750,000 (including FHOG applications):
Base Stage
On completion
For Fixed price contract over $750,000 (including FHOG applications):
All stages
The final progress draw should not be made until the Certificate of Occupancy is obtained. A copy of all draw down requests is to be held on the loan file. The normal benchmark for progress payments is as follows and fixed price contract payments should align with these percentages:
5% Deposit
10% Base
15% Frame
35% Lockup
25% Fixing
10% Completion
Any significant departure from the above should be discussed with the borrower and the possible implications of not being able to satisfy cost to complete requirements. Calculations should be completed to ensure there is no shortfall in funds, or issues with the requested LVR, where a building contract is ‘front end loaded’. Borrowers will typically either need equity in their land, or funds to put towards the construction initially, where the percentages above are higher in the first few stages . Borrower and Builder Relationship Fixed Price contracts where the building entity is a direct relation to the borrower are classified as an Owner Builder. Most lenders are no longer able to accept fixed price contracts which are not ‘arm’s length’. These direct relationship (not at arm's length) is defined as:
The applicant is a director/shareholder of the building entity
The applicant is part of the immediate family of the ownership of the building entity. Immediate family is defined as:
Parent/ Grandparent
Child
Sibling
For further information please contact our finance specialist.
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