Building or buying land? Which loan is right for you?

The path to home ownership isn’t always inspections and open homes. For many it starts with a block of land. That also means a loan to buy land. And then the fun really begins when it comes time to build.

Buying land and building can be a bit more of a complicated process than simply buying a pre-existing home, and you might not be sure where to start. But when it comes to getting a loan to buy land and build, it’s easier than you think. Whether you’re looking for just a loan to buy land, or maybe you’re planning to build but you’d like to know exactly how does a home construction loan work, let’s walk you through what to expect.

Let’s start with the basics.

I need a loan for a block of land but I’m not ready to build yet. Can I get a loan?

Yep. You can apply for a loan that will be secured against the value of the land. You might have heard of this referred to as a ‘land loan’, but it’s just a loan.

Will I need a land loan deposit?

Most likely. But it depends on the specifics of your loan.

Ok, I’ve got my land and I’m ready to build. What now?

When you’re ready for construction and need finance, you’ll need a new loan. It’s called, you guessed it, a construction loan.

Is there anything special I need for a construction loan?

There is a little bit of paperwork involved. You’ll need to get:

  • Signed and dated Fixed Price Builders’ Contract
  • Progress payment schedule as set out in the Fixed Price Builders’ Contract
  • Copy of council approved plans and building specifications for your construction
  • Quotes of any work not included in the builders fixed price contract but may be needed for the valuation e.g. landscaping
  • Copy of the builder’s registration/certification documentation
  • Copy of the builders’ insurance policy with BOQ’s interest noted for the property being constructed.

Check out our helpful construction loan guide.

How does a home construction loan work?

Unlike regular home loans where you typically receive a lump sum of the loan amount at settlement, construction loans are paid out in portions as you need them. They’re called ‘progress payments’ or a ‘draw down’ and they happen periodically at different stages of construction.

There are usually about 3 stages, including:

  • A base stage/deposit stage – where we help you with all the initial paperwork, plus provide you with the contract and payment schedule
  • The frame stage to fixing stage – where you’ll receive a builder’s tax invoice (plus a tiny bit more paperwork
  • The final stage – you’ll receive another builder’s tax invoice, and you’ll also need to provide us with the certifications specific to your state.
  • Check out our handy guide for more detail.

With progress payments you avoid giving your builder or contractor a lump sum at the start. Not only does that help you manage your money, it helps to make sure your builders are only paid for work that’s actually been done, and they aren’t being paid for work that hasn’t been done, or done poorly.

Do I need a construction loan deposit?

Keep in mind that the greater your construction loan deposit, the less you borrow and the smaller your LVR (loan to value ratio). LVRs greater than 80% may attract LMI (lenders mortgage insurance) and face higher interest rate charges.

When do I need to start making repayments on my construction loan?

As soon as you’ve received some of your loan amount, it’s time to start making repayments. The good news is that typically you will only need to make interest only payments during the construction period. Interest is also only charged on the amount drawn down, not the total value of the loan.

Can I get a construction loan if I plan to buy land and build at the same time?

You can if you’re purchasing a home and land package. You just need to be able to supply all the same paperwork for your build.

I’ve heard I can get the FHOG. Is that right?

If this is your first home, good news! Depending on where you live, you should get between $7,000 and $27,000 to go towards your build.

If you’re eligible for the First Home Owner's Grant (FHOG), you’ll need to submit the FHOG application at the same time you apply for the loan.

Whether you’re buying land or ready to build, we can help you find the best loan option for you. Enquire Now.