Top Strategies to Understand Construction Loan Fees

Understanding Construction Loan Fees for Your Building Project

Construction loans operate differently from traditional home loans, and understanding the fee structure is crucial for anyone planning a new build, major home renovations, or house & land packages in Moorabbin. Unlike standard mortgages, construction loans involve progressive drawdown payments throughout various stages of the project, which means the fee structure is more complex.

When applying for a loan through Finance Broker Melbourne, we help you access Construction Loan options from banks and lenders across Australia. This gives you the advantage of comparing different fee structures to find the most suitable option for your specific project needs.

How Construction Loan Interest Rates Work

One significant advantage of construction loans is that lenders only charge interest on the amount drawn down, not the full loan amount. This means during the early stages of construction, when you've only drawn a small portion of your approved loan amount, you're paying interest on significantly less money than the total loan value.

Most construction loans offer interest-only repayment options during the construction phase. This helps manage cash flow while you're potentially paying rent elsewhere and managing construction costs. The interest rate structure typically converts to principal and interest repayments once construction is complete.

Progressive Payment Schedule and Related Fees

Construction loans operate on a Progressive Payment Schedule that aligns with construction milestones. Each drawdown typically incurs a Progressive Drawing Fee, which varies between lenders. These fees can range from $200 to $500 per drawdown, depending on your lender and loan structure.

The typical progressive payment stages include:

1. Land purchase or deposit - Usually 10-20% of total loan amount
2. Foundation/slab completion - Approximately 15-25%
3. Frame completion - Around 15-20%
4. Roof and wall completion - Typically 20-25%
5. Internal fit-out stages - Progressive payments for plumbers, electricians, and other trades
6. Practical completion - Final drawdown

Valuation Fees and Assessment Costs

Construction loans require an 'as if complete' valuation, which assesses the property's value once construction is finished. This valuation fee typically ranges from $300 to $800, depending on the property location and complexity. Some lenders may require additional inspections at various stages of the project, each potentially incurring inspection fees.

Council and Regulatory Fees to Consider

Before construction begins, you'll need to secure council plans and permits. While these aren't direct lending fees, they're essential costs that impact your overall project budget. Council restrictions and council regulations vary significantly across different areas, and permit costs can range from several hundred to several thousand dollars.

If you're planning to demolish existing property for a new build, additional permits and fees apply. Your registered builder should provide guidance on these requirements, but it's wise to factor these costs into your total project budget when determining your loan amount.

Additional Costs and Out of Contract Items

Many construction projects involve additional payments beyond the original fixed price contracts. Out of Contract Items not included in your initial building contract can significantly impact your budget. These might include:

• Upgraded fixtures and fittings
• Site-specific requirements identified during construction
• Council-required modifications
• Additional work for connecting utilities

When working with your registered builder, ensure you understand what's included in the base contract and budget for potential variations.

Application and Establishment Fees

The streamlined application process for construction loans through Finance Broker Melbourne involves several establishment fees. These typically include:

• Application fees ranging from $600 to $1,200
• Legal fees for loan documentation
• Mortgage registration fees
• Lender's legal costs

Some lenders waive application fees as part of promotional offers, while others may negotiate fees based on the loan amount and borrower profile.

Timeline Requirements and Penalty Fees

Most construction loans require you to commence building within a set period from the Disclosure Date, typically 6-12 months. Failing to meet this deadline may result in penalty fees or loan cancellation. Similarly, construction must progress within reasonable timeframes, with some lenders imposing fees if the project extends significantly beyond the agreed completion date.

Planning Your Construction Loan Budget

When working with suitable land for your project, make a plan that includes all potential fees and costs. Consider whether you're buying off the plan, undertaking major renovations, or starting a complete new build. Each scenario has different fee implications.

For those in an ideal location like Moorabbin, understanding your price range should include:

• All lender fees and charges
• Council and permit costs
• Professional fees (architect, engineer, certifier)
• Contingency for variations and Out of Contract Items
• Costs to pay sub-contractors if managing aspects of the build yourself

Some borrowers combine construction loans with a home improvement loan for additional features or upgrades not covered in the primary construction contract.

Whether you're planning a renovation, new construction, or considering investment loans for development projects, understanding the complete fee structure helps you make informed decisions about your construction project.

Call one of our team or book an appointment at a time that works for you to discuss your construction loan needs and get a clear breakdown of all associated fees for your specific project.