Is it cheaper to build or buy a house?
We reveal some of the important factors that can help you decide
09 Dec, 2024
Lender | Home Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Repayment type | Rate Type | Offset | Redraw | Ongoing Fees | Upfront Fees | Max LVR | Lump Sum Repayment | Additional Repayments | Split Loan Option | Tags | Features | Link | Compare | Promoted Product | Disclosure |
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
6.43% p.a. | 6.69% p.a. | $2,679 | Interest-only | Variable | $0 | $530 | 80% |
| Promoted | Disclosure | ||||||||||
6.44% p.a. | 6.85% p.a. | $3,141 | Principal & Interest | Variable | $395 | $null | 95% | |||||||||||||
6.64% p.a. | 7.02% p.a. | $2,767 | Interest-only | Variable | $null | $720 | 90% | |||||||||||||
6.64% p.a. | 7.10% p.a. | $2,767 | Interest-only | Variable | $0 | $530 | 80% | |||||||||||||
6.78% p.a. | 6.82% p.a. | $2,825 | Interest-only | Variable | $0 | $450 | 80% | |||||||||||||
7.05% p.a. | 6.24% p.a. | $3,343 | Principal & Interest | Variable | $0 | $1,212 | 70% | |||||||||||||
6.14% p.a. | 6.16% p.a. | $3,043 | Principal & Interest | Variable | $0 | $350 | 60% | |||||||||||||
7.24% p.a. | 7.67% p.a. | $3,017 | Interest-only | Variable | $20 | $644 | 90% | |||||||||||||
8.39% p.a. | 8.72% p.a. | $3,806 | Principal & Interest | Variable | $0 | $0 | 75% | |||||||||||||
8.68% p.a. | 8.75% p.a. | $3,909 | Principal & Interest | Variable | $0 | $900 | 80% |
In this page:
As the name implies, a construction loan is designed for borrowers building a home or undergoing significant renovations, rather than buying an existing property.
Unlike a regular home loan, a construction or building loan covers expenses incurred as the building process takes shape.
Those taking out construction loans typically incur interest only repayments during the construction period. This means repayments stay relatively low while the home is being built.
Construction loans operate through a process known as 'progressive drawdown.' The loan amount is progressively disbursed as different stages of the building or renovation works are completed.
When building or renovating a home using a construction mortgage, you'll only pay interest on the funds used until the building process is completed.
Your builder will outline the total funds needed to construct your home, dividing expected costs into several segments.
Your lender will make payments to your builder at every stage of construction. As each phase is completed, your lender will require you to present an invoice from your builder to issue payment.
Your lender will likely be very involved in the process. Typically, they will send someone to inspect the progress of construction before releasing the next payment to your builder.
Construction of a house is typically divided into six stages:
If you have a construction loan, your lender will only charge interest on the amount of credit drawn down at any particular stage of construction.
For example, if you're approved for a $300,000 construction loan and you've spent $100,000 on the building process so far, you'll only pay interest on the $100,000 that's been drawn down.
Throughout construction, your repayments will be interest only. At the end of the build process, you may ask your lender if you can continue making interest only repayments, or you could change your loan to principal and interest and begin repaying your outstanding balance.
Some homeowners choose to refinance their construction loan after the build process is finished. Some construction loans, meanwhile, automatically convert to a standard mortgage when the house is fully constructed.
Construction loans tend to have higher interest rates than traditional principal & interest (P&I) home loans. This is largely due to three factors:
Various fees associated with construction loans may also be higher than those of traditional mortgages. The valuation fee, for example, might be higher as the valuer must assess the home’s worth at each stage of construction.
There are a few factors to weigh up when considering building a home versus buying an existing one, not least of which involve taking out a construction loan.
Construction loans usually only demand interest only repayments while the build process is underway, meaning repayments are lower during this phase.
Once construction ends, the home loan might be transformed into a regular mortgage with principal and interest payments. This means you will start to pay down the principal of the loan, which could see your regular repayments jump significantly.
If the total life of the home loan, including the construction phase, is 30 years, the time in which you're paying off your principal balance could be condensed into 28 years. This can make your ongoing repayments larger than they might have been had you bought an established property.
However, building your own abode might work out to be more cost-effective overall than buying an established house, and you'll get to craft it just the way you like it.
Embarking on a house renovation or build generally requires a person to have a solid grasp on construction loans and finance. Check out the guides below to discover different financing options and learn what to consider before you start construction.
Streamline your home renovation process with Your Mortgage’s expert insights. Discover guides and tips for successful renovations, essential considerations when renovating an apartment, and simple yet effective home improvement tips to enhance your property's value.
When entering a construction contract, you and the builder need to decide between a fixed-price and a cost-plus arrangement. Each has its benefits, depending on your priorities and financial situation.
Pros of a fixed-price contract:
Predictable Costs
A fixed-price contract sets a predetermined cost for the entire project. This is ideal for those with a tight budget, as it provides certainty and helps avoid unexpected expenses.
Risk Management
The builder bears the risk of cost overruns, which can provide peace of mind to homeowners. Any additional costs due to delays or material price increases are typically the builder's responsibility.
Pros of a cost-plus contract:
Flexibility
A cost-plus contract covers the actual costs of materials and labor plus an agreed-upon fee or percentage for the builder. This can be advantageous if you want the flexibility to choose higher quality or custom materials throughout the project.
Potential for higher quality
If budget flexibility allows, you can opt for better materials and workmanship, potentially leading to a higher quality finished product.
Fixed-price contracts are generally better for those who need strict budget control, while cost-plus contracts can be more suitable for those who prioritise customisation and are willing to invest in higher quality materials and finishes.
Structural renovations involve substantial modifications to the core framework of your home. These changes can significantly impact the layout, functionality, and stability of the structure. They usually require detailed architectural plans, building permits, and professional oversight to ensure compliance with building codes and regulations.
Non-structural renovations are primarily cosmetic and focus on enhancing the appearance and comfort of your home without altering its fundamental structure.
Many lenders will allow you to tap into the equity you’ve built in your current home to fund the construction of your next home.
Equity is the portion of a property's value that isn't funded by a home loan. For example, if you own a home worth $700,000 and have a $500,000 mortgage, you'll have $200,000 of equity.
Equity can often be used as a deposit on a construction loan.
One of the main things to consider when accessing equity is that you'll be eating into your financial buffer if things go wrong. For instance, if the property market were to experience a downturn, you could find yourself in negative equity – which means you owe your lender more than your home is worth.
Another consideration is the fact that you could end up needing to meet repayments on two mortgages, which could take up a significant chunk of your household budget.
Yes, a construction loan can be used to fund a renovation.
However, the renovations in question may need to be substantial to meet lenders' criteria. A substantial renovation could include projects like a complete backyard remodel with the addition of a pool, deck, and other features, adding another storey to a home, or undergoing an extension.
Some lenders instate a minimum loan size for a construction mortgage. If your renovations are expected to cost less than the minimum loan loan size, your project might not qualify for a construction home loan.
Construction loans can be harder to qualify for than standard home loans due to the added risks and complexity. Lenders typically require detailed building plans, a signed contract with a licensed builder, and sometimes a higher deposit. A strong credit score and stable income can improve your chances.
In most cases, a standard home loan isn’t suitable for construction because it doesn't accommodate progress payments. Construction loans are specifically structured to fund each building phase, allowing you to pay only interest on the drawn funds until the build is complete.
Most major Australian lenders, including banks like Commonwealth Bank, ANZ, Westpac, and NAB, as well as some smaller banks and credit unions, offer construction loans. Each lender has unique criteria and interest rates, so it’s a good idea to compare options.
A progress payment is a payment made to the builder at each stage of construction, drawn from the construction loan. Lenders release these payments directly to the builder after inspecting the work completed at each stage, such as the slab, frame, lockup, and final stages.
Not sure which type of loan is best for your needs?
Your Mortgage can help you find out.