In the weekend I was contacted by a couple that are looking to buy a house and land package and wanted one of the residential construction loans where interest payments are not required durring the build.
They contacted me after trying the banks as they had heard that I was an expert with new build finance.
The enquiry read;
I am interested in a construction loan where I can start paying the interest on the lending once the house is already completed.
Can I have more information on that area?
How that works exactly?
What are the interest rates that apply?
I have 10% of deposit and I am trying to buy a home and land package where the floor plan is customised so it requires progress payments.
I have been checking with some banks and not one bank has been able to offer me an option like this.
I heard you are the expert on residential construction loans and so would love to hear about what options can I have.
To be honest, most banks are not very good at structuring residential construction loans and in most cases you will need to pay the interest during the build.
Residential Construction Loans Where Interest Payments Are Not Required
As a rule the banks do not offer residential construction loans where there are no repayments; however as a new build finance specialist we are currently working with a bank to offer this.
It is a trial that the bank are running with a few selected mortgage brokers, and we have been selected as we do a lot of this kind of lending.
This is designed specifically to work where there are build contracts with progress payments.
How Do The Loans Work?
How this works will depend on the actual house and land values plus the build contract.
Using an example of land worth $500,000 and a build of $500,000 just to make my numbers easy
Effectively as an example it works like this;
You purchase the land for $500,000 and with your deposit of $100,000 (10% overall cost) you are borrowing $400,000
On this you can get a standard bank loan at the special interest rate of 3.99% fixed for 2-years
You will need to pay the interest on this loan which is about $1,330 monthly or just over $300 per week.
You then have the build for $500,000 which is generally funded by progress payments starting with a 10% ($50,000) deposit.
There are two loan facilities set up;
- A facility of $500,000 for the build which is drawn down progressively
- A facility to pay the interest on loan A which is drawn down monthly to fund this
Both these loans are set up as construction loans which are effectively revolving credit loans but without client access – drawn down as per invoices from the building company for loan 1 and as per interest due for loan 2.
You pay the floating interest rate and as you are borrowing over 80% there will be a low equity margin of 0.50% applied to these loans = 6.30%
These Residential Construction Loans Are Better
Not everybody needs a residential construction loan where there is no requirement to pay the interest during the build; however it can be very useful.
Even when you don’t “need” to avoid paying the interest, it can help reduce any financial stress during this time.
The good thing is these loans have all the same features of your typical bank loans.
It can be useful to use residential construction loans where there is no requirement to pay the interest during the build, but they are not offered by most banks.
This is another reason to contact the new build finance specialist, Stuart Wills.
