Construction Loan Fees and Hidden Costs to Avoid

Understanding Construction Loan Fees

Construction loans differ significantly from standard home loans, particularly when it comes to fee structures. As a midwife planning to build your dream home, understanding these costs upfront will help you budget effectively and avoid unexpected expenses throughout the building process.

Unlike traditional mortgages where you receive the full loan amount upfront, construction loans operate on a progressive drawdown system. This means you only charge interest on the amount drawn down at various stages of the project, which can be advantageous for managing costs during construction.

Common Construction Loan Fees to Expect

Application and Establishment Fees

Most lenders charge an application fee when you submit your construction loan application. These fees typically range from $300 to $800 and cover the cost of processing your application and conducting initial assessments.

Progressive Drawing Fees

One of the most significant ongoing costs is the Progressive Drawing Fee. Lenders charge this fee each time you request funds during construction milestones. These fees can range from $150 to $500 per drawdown, and with typically 5-6 progress payments required during construction, this can add up to a substantial amount.

Valuation Fees

Construction loans require an 'as if complete' valuation, which estimates the property's value once construction is finished. This specialised valuation typically costs between $300 to $800, depending on the property's complexity and location.

Interest Rate Structures and Repayment Options

During the construction phase, most lenders offer interest-only repayment options, meaning you only pay interest on funds already drawn down. The interest rate during construction is often higher than standard variable rates, typically adding 0.5% to 1.5% to the base rate.

Once construction is complete, your loan typically converts to a standard home loan with principal and interest repayments at more competitive rates.

Additional Costs During Construction

Progress Payment Management

Your lender will typically require a Progressive Payment Schedule from your registered builder before approving drawdowns. This schedule outlines when funds will be released to pay sub-contractors, including plumbers and electricians, at predetermined construction milestones.

Council and Legal Requirements

Before construction begins, you'll need council plans, permits, and possibly a development application. While not direct loan fees, these costs are essential for loan approval and can range from $2,000 to $10,000 depending on your local council restrictions and council regulations.

Out of Contract Items and Variations

One area where costs can escalate quickly involves Out of Contract Items not included in your fixed price contracts. These might include:

• Landscaping beyond basic requirements
• Premium fixtures and fittings
• Additional electrical or plumbing work
• Structural changes during construction

When budgeting for these items, remember that additional payments may require separate financing arrangements or impact your loan amount.

Specific Scenarios and Fee Implications

House & Land Packages

For house & land packages, some lenders offer streamlined application processes with reduced fees. However, you must still commence building within a set period from the Disclosure Date, typically 12-18 months.

Major Home Renovations

If you're planning major home renovations rather than a new build, you might consider a home improvement loan instead. These loans often have different fee structures and may be more suitable if you're not planning to demolish existing property.

Buying Off The Plan

When buying off the plan, construction loan fees may be structured differently, with some lenders offering reduced Progressive Drawing Fees since the developer manages the construction process.

How to Minimise Construction Loan Fees

Choose the Right Loan Structure

Working with a renovation Mortgage Broker who can access Construction Loan options from banks and lenders across Australia ensures you find the most suitable fee structure for your situation. Different lenders have varying approaches to fee structures, and some may waive certain fees for healthcare professionals.

Plan Your Drawdowns Carefully

To minimise Progressive Drawing Fees, work with your builder to consolidate payments where possible. However, ensure this doesn't compromise quality control or create cash flow issues for your registered builder.

Consider Your Timeline

Having a realistic timeline and being prepared with all required documentation can help avoid delay fees and additional charges.

Making Informed Decisions

When planning your construction project, make a plan that includes:

1. Identifying your ideal location and suitable land
2. Determining your price range including all associated fees
3. Understanding your borrowing capacity for the total project cost
4. Researching council regulations and restrictions
5. Obtaining quotes from multiple registered builders

Remember that construction loans require careful financial planning beyond just the loan amount. The various fees and charges can add thousands to your total project cost, so factor these into your budget from the beginning.

For midwives considering a construction project, understanding these fee structures is crucial for making informed financial decisions. Each lender has different approaches to construction loan fees, and what works for one borrower may not be optimal for another.

Whether you're planning a new build, major renovations, or buying off the plan, having expert guidance through the process can help you understand all costs involved and choose the most appropriate loan structure for your circumstances.

Call one of our team or book an appointment at a time that works for you to discuss your construction loan options and ensure you understand all associated fees before committing to your building project.