Understanding the basics of Construction Loan Fees

What Are Construction Loan Fees?

Construction loans differ significantly from traditional home loans, particularly when it comes to fees and payment structures. For pharmacy assistants looking to build their dream home, understanding these costs upfront can help you make informed decisions about your borrowing options.

Unlike standard mortgages where you receive the full loan amount upfront, construction loans operate on a progressive drawdown system. This means you only charge interest on the amount drawn down at each stage of construction, which can result in substantial savings during the building process.

Key Construction Loan Fee Types

When applying for a loan through lenders across Australia, you'll encounter several specific fees:

Progressive Drawing Fees

• These fees apply each time funds are released during various stages of the project
• Typically range from $150 to $500 per drawdown
• Cover the administrative costs and inspections required before releasing funds

Valuation Fees

• Construction loans require an 'as if complete' valuation
• This estimates your property's value once construction is finished
• Fees generally range from $300 to $800 depending on the loan amount and property complexity

Application and Establishment Fees

• Standard fees that apply when you submit your loan application
• Many lenders now offer a streamlined application process
• These fees can vary significantly between different banks and lenders

How Progressive Drawdowns Work

Construction loans release funds in instalments based on construction milestones. Your registered builder will request progress payments as work reaches predetermined stages:

1. Slab completion
2. Frame completion
3. Roof completion
4. Lock-up stage
5. Fixing stage
6. Practical completion

Each drawdown requires inspection and approval before funds are released to pay sub-contractors and suppliers.

Interest Rate Considerations

During construction, most lenders offer interest-only repayment options on the amount drawn down. This means if you've drawn $200,000 of a $400,000 loan, you only pay interest on the $200,000, not the full loan amount.

Once construction completes, your loan typically converts to a standard principal and interest home loan. The interest rate during construction may differ from the ongoing rate, so clarify this with your lender.

Additional Costs to Consider

Council Requirements

• Council plans and permits are essential before construction begins
• Development applications may be required depending on your build
• These costs aren't typically included in your construction loan

Out of Contract Items

• Features not included in your fixed price contracts
• Landscaping, driveways, and certain fixtures often fall into this category
• Budget for these additional payments separately

Professional Services

• Surveyors, engineers, and other specialists
• Required for suitable land assessment and compliance
• Consider these when determining your overall budget

Timeline Requirements

Most construction loans require you to commence building within a set period from the Disclosure Date, typically 6-12 months. This timeline helps lenders manage their risk and ensures your approved interest rate remains current.

For major home renovations or buying off the plan arrangements, different timelines may apply. Always confirm these requirements during your application process.

Construction Loan vs Home Improvement Loan

If you're planning to demolish existing property for a new build, a construction loan is typically more appropriate than a home improvement loan. Construction loans are specifically designed for:

• New builds on vacant land
• House and land packages
• Complete demolish and rebuild projects
• Major structural renovations requiring council approval

Making Your Plan Work

Before applying, establish your ideal location and price range. Research council restrictions and council regulations that might affect your build. Consider factors like:

• Access to public transport for your work as a pharmacy assistant
• Proximity to healthcare facilities
• Local amenities and schools
• Future growth potential of the area

Working with Professionals

Construction projects require coordination between multiple professionals including plumbers, electricians, and your registered builder. Your Progressive Payment Schedule should align with actual construction milestones to ensure proper cash flow management.

A renovation mortgage broker can help you access construction loan options from banks and lenders across Australia, comparing terms and fees to find suitable financing for your project.

Understanding construction loan fees helps you budget accurately for your building project. While these loans involve more complexity than standard home loans, they provide the flexibility needed for construction projects while minimising interest costs during the building phase.

Call one of our team or book an appointment at a time that works for you to discuss your construction loan options and get personalised advice for your building project.