Construction loans allow you to borrow the cost of building a home, often including the cost of the purchase of the land (sometimes called a house and land package loan).
Generally, construction loans are interest only during the construction period and then convert to a standard principal and interest loan.
Common features:
- Interest only during the construction period (usually a maximum of twelve months).
- Additional repayments: usually not allowed during construction, but available after construction is completed.
- Redraw: not usually allowed during the construction period, but available after construction is completed.
- Common payment frequencies: monthly interest only during construction, then weekly, fortnightly, or monthly for regular repayments. One-off repayments usually discouraged during the construction period.
- Common payment methods: direct debit, salary credit, and BPAY.
- Internet and telephone banking access.
- Statements: usually monthly during construction; but often 6 monthly as at 31 December and 30 June.
Subcategories:
Owner Builder: A construction loan in which you are the builder. These loans are generally seen as more risky by lenders. Owner builders are often inexperienced and routinely underestimate the total cost to complete construction.
As a result, the maximum loan and loan to value ratio (LVR) amounts are generally lower. This means you can usually only borrow up to 60–70 percent of the value of the completed property.
Annual Fee or Pro Pack Loans: Lenders often call these loans “Pro Packs.” However, they are better described as annual-fee loans, as the objective of the product is to attract large loans, not just loans to professionals such as solicitors or accountants.
These days, virtually every US home loan lender has a loan that attracts borrowers with an annual fee as a trade-off for a reduced interest rate, the discounts offer vary from 0.25–0.90 percent.
In the past, the banks would have had you believe that such loans were only available to high-income professionals with larger home and investment loans, but today virtually anyone requiring a loan of $250,000 or more can access such a home-loan product.
But with these fees ranging from $200 up to a whopping $500 per year, are these loans really offering value for the money? What is clear is that, as the amount of these loans increases, the trade-off between a lower interest rate and the annual fee amount becomes more attractive.
But to really determine if such a product will benefit you and your financial position, you need to consider three things:
- Size does matter. Simply put, the bigger the loan, the bigger the relative saving in interest. If you receive an interest rate discount of 0.25 percent on a $250,000 loan, your maximum saving will be $625 per annum. But if your loan was $600,000, the saving would be up to $1,500.
- Paying the fee in arrears is better value. If a lender is asking for an annual fee in advance, they are having your cake and eating it too! After all, it will take you the full year to achieve the corresponding benefit in reduced interest.
- Your financial plans affect the outcome, so plan well. If you receive a discount of 0.25 percent on a $250,000 loan and make the minimum repayments over the full term of the loan (usually thirty years), you will save a maximum of $14,699 (so long as you pay the annual fee in full and don’t add it to the balance of your loan).
However, if you were to repay an extra $50 per month, you would save well over $32,000! Depending on the individual situation, an annual-fee loan may or may not be good value.
Certainly for anyone with a loan of less than $250,000, the cost of the annual fee is debatable. Remember, even if you save $625, you may be paying an annual fee of $500, giving you a net saving of just $125 per year.
Common features:
• See principal and interest loans.
Packaged Loans: Most of the big banks offer annual fee loans with a discount that also “packages” other financial products that are discounted. For example, my loan is a package where I also get a fee free transaction account and a credit card with no annual fee.
The package also has options for house and content insurance where the discount is about 25%. These packages can save you money, and as all your financial products are with one company you can usually see everything on your internet banking.