What is a Knockdown Rebuild Project?
A knockdown rebuild involves demolishing your existing home and constructing a new property on the same block of suitable land. For Hampton residents, this option has become increasingly popular as it allows homeowners to build their dream home while remaining in their preferred location. Unlike purchasing house & land packages in new estates, a knockdown rebuild lets you maintain your established neighbourhood connections and take advantage of your existing land.
The process requires careful planning, from obtaining council approval and submitting your development application to working with a registered builder and managing the construction draw schedule. Most importantly, it requires specialised new home construction finance that differs from traditional home loans.
How Construction Loans Work for Knockdown Rebuild Projects
Construction finance operates differently from standard mortgages. Rather than receiving the full loan amount upfront, lenders release funds through a progressive drawdown system aligned with your progress payment schedule. This means you only charge interest on the amount drawn down at each stage, which can result in considerable savings during the building phase.
The typical construction to permanent loan structure includes:
- Initial land valuation and loan approval
- Progressive Payment Schedule aligned with building milestones
- Interest-only repayment options during construction
- Conversion to principal and interest repayments once construction completes
- Progress inspection requirements before each drawdown
The Construction Loan Application Process
When applying for construction funding, lenders assess several factors beyond standard home loan criteria. You'll need to provide:
- Council plans and development application approval
- A fixed price building contract with a registered builder
- Detailed costings from your builder
- Evidence you can commence building within a set period from the Disclosure Date
- Proof of adequate insurance coverage
Lenders typically require a cost plus contract or fixed price contracts to determine the loan amount. Your mortgage broker in Hampton can help you access Construction Loan options from banks and lenders across Australia, ensuring you find suitable terms for your project.
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Understanding Progress Payments and Draw Schedules
Your construction draw schedule outlines when funds are released during the building process. Most lenders follow a standard progress payment finance structure:
- Deposit: 5-10% on contract signing
- Base stage: After concrete slab completion
- Frame stage: Once the frame is erected and roof installed
- Lock-up stage: When windows, doors, and external cladding are complete
- Fixing stage: After internal fixtures, plumbers, and electricians complete their work
- Completion: Final payment once the building is finished
Each drawdown typically incurs a Progressive Drawing Fee, and lenders conduct a progress inspection before releasing funds. This protects both you and the lender by ensuring quality construction standards are maintained throughout the project.
Interest Rates and Costs During Construction
Construction loan interest rates may differ slightly from standard home loan rates. During the building phase, you'll make interest-only repayments based solely on the funds drawn down, not the entire loan amount. This means your repayments gradually increase as more funds are released to pay sub-contractors and suppliers.
For example, if your total project home loan is $800,000 but only $200,000 has been drawn down, you'll only pay interest on that $200,000. This structure provides significant financial relief during construction when you may still be paying rent elsewhere or managing dual housing costs.
Some lenders also charge establishment fees, valuation costs, and the Progressive Payment Schedule administration fees. Working with an experienced renovation Finance & Mortgage Broker ensures you understand all costs upfront.
Land and Construction Package Considerations
For knockdown rebuild projects, you're effectively working with a land and construction package where you already own the land. This can work to your advantage, as lenders view existing homeowners with established equity favourably. Your existing property value contributes to your deposit, potentially eliminating the need for Lenders Mortgage Insurance.
If you're considering owner builder finance, be aware that fewer lenders offer this option, and those that do typically require evidence of construction experience and may lend smaller loan-to-value ratios.
Comparing Construction Finance Options
Different lenders offer varying terms for building new home finance. Key factors to compare include:
- Construction loan interest rate during and after building
- Progressive Drawing Fee amounts
- Flexibility for additional payments during construction
- Options to lock in rates before construction begins
- Conversion terms once your custom home is complete
Finance Broker Melbourne provides access to multiple lenders' construction loan products, allowing Hampton residents to compare options suited to their knockdown rebuild project. This is particularly valuable given the significant loan amount typically involved in building a new home.
The Knockdown Rebuild Timeline
Understanding the construction funding timeline helps you plan effectively:
- Pre-approval stage: 2-4 weeks to secure conditional approval
- Planning and council approval: 2-6 months depending on your custom design
- Final loan approval: 2-4 weeks once all documents are provided
- Demolition: 1-2 weeks
- Construction: 6-12 months depending on project complexity
- Final inspection and settlement: 2-4 weeks
Most lenders require you to commence building within a set period from the Disclosure Date, typically 12 months, so ensure your project timeline aligns with these requirements.
Why Choose a Specialist Construction Finance Broker
Construction loans involve more complexity than standard home loans. A specialist broker understands the nuances of progress payment finance, can negotiate better terms with lenders, and guides you through each stage from application to final drawdown.
For Hampton residents, working with a local broker means they understand the area's property values, council requirements, and building costs. They can also assist if your project scope changes or if you need to discuss renovation options as alternatives to a full knockdown rebuild.
Whether you're planning a custom design with unique features or a more straightforward replacement home, the right construction finance structure makes your project viable and manageable. With interest-only repayment options during construction and the ability to only pay interest on drawn funds, construction loans are specifically designed to support your build dream home journey.
Call one of our team or book an appointment at a time that works for you to discuss your knockdown rebuild project and explore your construction funding options.