Construction loans explained

The vast majority of customers will require some form of finance to complete their residential build project. This will likely involve a bank or a financier. Due to the nature of construction, finance for a build project is slightly different than a standard mortgage.

The key difference is that a construction loan helps you pay for your build progressively, as and when you need the funds. As your project may take twelve months to complete, you do not want to be paying interest on the whole amount for the entire building period.

What Is a Drawdown

As each of the phases of your build is completed, you draw down only the funds you need to pay your builder and suppliers. What this means is that with a construction loan, you only complete a drawdown and start paying interest on the drawn down amount once you’re completely satisfied that all work that was agreed upon has been completed.

To complete a drawdown, the bank will ask you for documents such as the builder’s invoices and a progress claim certificate. In some circumstances the bank may also send out a valuer to check that the progress stage has been reached.

Who Do I Speak To

There are specialist mortgage brokers that can assist with construction loans. One thing to be aware of is that many banks will not approve a loan for the purchase of vacant land without a construction contract also being completed and ready to go. Obviously every bank is different and your individual finance situation will need to be taken into account. However, this is something to keep in mind; you may not be able to settle on the land alone.

It is important when speaking with your bank that you make it very clear that you are seeking a construction loan; your property will not come up to valuation if it is not yet constructed, so you do not want to fill in a standard mortgage application only for it to be discovered at a later date that no funds can be forwarded under this product (this unfortunately happens more commonly than you think).

What to Do Throughout Construction

Your bank is not officially a party to the construction contract, so the progress claim invoices will be sent to you by the builder. It will be up to you to forward the invoice and accompanying documents to your bank; some banks will ask you to fill in an approval form at each stage stating that you want the funds to be drawn down.

It is important that you ask the bank at the time of contract signing what their processes are, or you may be in breach of contract if payment is delayed because the paperwork is not in order.

At Practical Completion

The bank will likely send a valuer out at practical completion before making the final payment to the builder. Once the final payment has been made by the bank, your loan will revert from a construction loan to a standard mortgage.

The builder will not give you possession of the property until they have been paid in full, so it is important that you fill in any final paperwork that the bank requests quickly; any delay ultimately means a delay in you gaining possession of your property.