Building in Moreton Bay? Here's How a Construction Loan Actually Works

If you're thinking about building a new home in Moreton Bay or Queensland, know this up front: a construction loan works differently from a standard home loan. Knowing how it works before you sign can save you a lot of stress mid-build.

The money comes out in stages

With a normal home loan, the lender pays the full amount at settlement. With a construction loan, the money is released in stages as the builder hits set milestones. Most builds follow five or six stages:

• Deposit, when the building contract is signed
• Slab, when the base or foundations are down
• Frame, when the house is framed
• Lock-up, when walls, windows and doors are in
• Fit-out, which covers the internal fixtures
• Completion, when the house is handed over

At each stage, the builder sends an invoice. The lender's inspector or valuer checks the work, and the lender pays the builder directly once you approve the payment.

Your repayments start small and grow

During the build, you usually pay interest only on the amount drawn so far, not on the full loan. After the slab stage, you're paying interest on a small slice of the loan. By completion, you're paying on the lot. After that, the loan normally switches to principal and interest repayments.

Plan for that growth, especially if you're renting while you build. For a few months you could be paying rent and a rising loan repayment at the same time.

Lenders usually want a fixed-price contract

Most lenders want a fixed-price building contract with a licensed builder before they'll approve the loan. Cost-plus contracts, where the final price isn't set up front, are much harder to finance because the lender can't confirm how much you need to borrow.

In Queensland, check your builder's QBCC licence before you sign anything.

Variations come out of your pocket

The lender pays up to the amounts in your approved progress payment schedule. If you add upgrades or the costs blow out, you'll generally have to cover the difference yourself or apply to borrow more. Build a contingency into your budget from day one.

Watch the extra costs

Many lenders charge a fee each time they release a progress payment, on top of the usual application and valuation fees. Delays cost money too. A longer build means more months of interest and possibly more months of rent.

Buying land first?

With a house and land package, the land usually settles first under its own contract, and then the build starts. If the land hasn't been titled yet, settlement can be months away, and your pre-approval may expire in the meantime and need renewing. Ask the lender how interest and repayments will work while the land sits empty.

First home buyers: building may unlock more help

In Queensland, building your first home can open the door to the $30,000 First Home Owner Grant and a full stamp duty concession on the land, if you meet the eligibility rules. The federal 5% Deposit Scheme can also be used to build. Each scheme has its own criteria, so check them before you commit.

Where Mark comes in

Construction lending policies differ a lot between lenders. They vary in:

• how they handle the land purchase
• what they charge for each progress payment
• whether they offer an offset account during the build
• what building contracts they'll accept

Mark will look at your contract, your budget and the lenders on his panel, then explain which option he recommends and why.

Planning a build? Talk to Mark at Bribie Island Lending before you sign the building contract, not after.

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