When it comes to purchasing a new home, we all tend to know two main terms regarding finance: home loan and mortgage. However, the standard home loan doesn’t quite fit the typical needs of a lendee building a property. A lump sum payment that might work to buy an existing house doesn’t necessarily support the process of building a new home. Paying in smaller sums along the way is a much more convenient, helpful and viable option. The best way to achieve this is via a construction loan. A construction loan is the best option for someone looking to build a home, and for good reason.
The benefits of a construction loan make up one of the primary advantages of building over buying existing property. Lending can be confusing so we asked our Construction Finance Manager, James Downey to answer the questions he’s often asked about what it is, its benefits and how it directly affects you.
What is a construction loan?
“Construction loans are loans provided by a lender to support structural amendments or a new construction of a property for lending purposes,” explains James. “Ordinarily, a construction loan will be a loan with five progressive payments outside of the initial deposit to support payment to the builder of the property as per a building contract and its payment schedule.”
How do they work?
“As the work is completed the builder will invoice you and you will in turn provide these to the lender to arrange payment either directly or by your broker/finance manager such as myself,” says James.
Your payments are released as they are required to be paid so you don’t need to have all your financing up front. When the build has been completed, the loan is then generally placed on ongoing principle and interest repayments.
What is the advantage of a construction loan?
“The advantage of a construction loan is that over the build period (normally up to 12 months) a lender will provide the construction loan on interest only repayments,” James explains.
“As the repayments are staggered through the build and on interest only repayments this provides the borrower with the ability to pay only interest until such time as the build is complete, meaning your actual repayments are far less during the build.”
How does it affect stamp duty?
“Another key advantage is the cost of stamp duty if you are considering purchasing land and building a home. Stamp duty is a state government duty that applies when purchasing land or a dwelling in NSW and can be a significant outlay for you,” James says. “For example, if you were to buy an existing house at $850,000 you would be subject to stamp duty in NSW of approximately $33,740.
“Conversely, if you were to buy land for $500,000, only the land (not your home build) is subject to stamp duty in NSW, which would be around $17,990, representing a healthy reduction in capital outlay.”
This means that you could have the same value home, saving just under half the cost of stamp duty and build the home you want.
What does it mean for first home buyers?
“For first home buyers have some exemptions and concessions as it relates to stamp duty for land. For example, land purchased with a value of less than $350,000 in NSW is currently exempt from stamp duty, and land between $350,000 -$450,000 have concessions,” says James.
“If you then build as a first home buyer and the total value is less than $750,000 then you may also be able to receive a $10,000 grant from the NSW government in addition to the reduced or nil stamp duty payable.”
For further information on concessions for first home buyers or speak with one of Clarendon’s internal construction finance managers.
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