Embarking on the thrilling adventure of purchasing an empty plot of land to bring your dream home to life is an exhilarating yet intricate journey. At Navanti Finance, we’ve had the privilege of guiding countless clients like you through every phase of this process, from acquiring land to realizing their dream homes. In this piece, we aim to offer invaluable insights into the nuances of financing, ensuring you, as prospective home builders, are equipped to maneuver through the complexities of land and construction loans seamlessly.
Understanding the Nuances: Land Loans vs. Construction Loans
As you delve into the realm of land and construction loans, grasping the fundamental distinctions between them is essential. Land loans facilitate the acquisition of the land alone, while construction loans are tailor-made to finance the actual building process. Construction loans disburse funds incrementally, aligned with the completion of key construction milestones. During the construction phase, interest is typically charged solely on drawn amounts, often on an interest-only basis. The borrowing limits are determined based on the property’s projected ‘on-completion value’ and the builder’s estimates.
Key Considerations for Opting for Land Loans ONLY:
1. Loan-to-Value Ratio (LVR): Most lenders impose stricter maximum LVR limits for land-only loans, potentially necessitating a higher initial deposit from you.
2. Intention to Build: Demonstrating a clear intention to build to the lender can enhance your eligibility for financing, instilling confidence in the project’s viability. Generally, lenders also require insight into the source of finance for your future build.
3. Cash Flow Management: Carefully assessing the financial implications of the new loan repayments during the land holding period and subsequent construction period is crucial. This ensures you are adequately prepared for any potential financial strain.
Key Considerations for Opting for Land & Construction Loans Combo:
1. Settlement Timing: This can create a situation where, to meet the land settlement deadline, you are rushed to finalise the fixed-price building contract, depriving you of sufficient time to complete due diligence and be thoroughly satisfied with the final specifications of your new house.
2. Deposit Timing: It’s common practice for lenders to retain enough loan proceeds for the final stages of the builder’s progress payments, leading to construction completion. Therefore, you will need to contribute all of your own funds in the early stage of the process, usually as early as at land settlement.
What about House and Land Packages?
We often get this question and how it differs in terms of its financing. The short answer is, there is no difference. A house and land package simply offers convenience, with the land vendor and builder collaborating to present a combined offering of land for sale and a suitable house design. However, these are still presented as separate contracts for the land and the build.
Despite its convenience, you need to be aware of the potential limitation in customising your new house design, as builders typically factor in the final package of specifications and inclusions already in the build contract. Significant change that requires a major reworking on the design of the house negates the primary benefit of having both contracts ready.
In conclusion, understanding the factors affecting your land loan is crucial for building your dream home. Whether opting for land loans only or a combined land and construction loans, confidence comes with the right guidance towards achieving your ultimate goal. At Navanti Finance, we specialise in tailored financial solutions, guiding you seamlessly through this process. Contact us today to begin your new home’s building journey with the right partner in finance.
