Construction Loan Fees and What You Need to Know

Understanding Construction Loan Fees

When planning to build your dream home in Canterbury, understanding construction loan fees is crucial for accurate budgeting. Construction finance differs significantly from standard home loans, with unique fee structures that reflect the complexity of funding a project that unfolds in stages rather than a single purchase.

At Law Home Loans, we help clients access construction loan options from banks and lenders across Australia, ensuring you understand every cost involved in your building journey.

Types of Construction Loan Fees

Construction loans come with several distinct fees that you won't typically encounter with traditional home finance. Here are the main charges you should anticipate:

Application and Establishment Fees

Lenders typically charge an application fee when you submit your construction loan application. This covers the administrative costs of assessing your financial situation, reviewing council plans, and evaluating your building project. Establishment fees cover the setup of your loan facility and can range from several hundred to over a thousand dollars, depending on the lender and loan amount.

Progressive Drawing Fee

One of the most distinctive costs in construction finance is the Progressive Drawing Fee. Unlike standard loans where funds are released in one lump sum, construction funding is released in instalments according to a construction draw schedule. Each time your registered builder requests payment based on completed work stages, the lender charges a Progressive Drawing Fee.

This fee typically ranges from $150 to $400 per drawdown, and you'll usually have five to six progress payments throughout your build. These fees cover the lender's costs for conducting a progress inspection to verify that work has been completed to an acceptable standard before releasing funds.

Valuation and Inspection Costs

Before approving your construction loan, lenders require a valuation of both the suitable land and the proposed completed property. This ensures the finished home will be worth the total loan amount. Valuation fees can range from $300 to $800 or more, depending on the property location and complexity.

Additionally, during construction, the lender arranges progress inspections at each stage of the construction draw schedule. While some lenders include a certain number of inspections in their fees, others charge separately for each visit. These inspections verify that building work matches the progress payment schedule before releasing funds to pay sub-contractors, plumbers, electricians, and other tradespeople.

Legal and Settlement Fees

Construction loans often involve multiple settlements. For a land and construction package, you'll first settle on the land purchase, then establish the building loan facility. Legal fees apply to both transactions. Some borrowers also require separate legal costs for reviewing fixed price building contracts or cost plus contracts with their builder.

Interest Rate Considerations

During construction, you'll only pay interest on the amount drawn down, not the full loan amount. This is actually an advantage of construction finance - you're not paying interest on money you haven't yet received. However, the construction loan interest rate during the building phase may differ from the final rate on your construction to permanent loan once building is complete.

Most lenders offer interest-only repayment options during construction, meaning you only make payments on the interest charged, not the principal. This keeps costs manageable while you're potentially paying rent elsewhere or managing dual housing costs.

Additional Potential Costs

Several other fees might apply to your building loan:

• Time Extension Fees: Most lenders require you to commence building within a set period from the Disclosure Date, typically 12 months. If delays occur with your development application or council approval, you may need to extend the loan approval, which can incur additional charges.

• Variation Fees: If you make changes to your construction plans or increase your loan amount after approval, lenders typically charge a variation fee.

• Early Repayment Fees: Some construction loans include break costs if you refinance before completing the build or shortly after.

Different Fee Structures for Different Projects

Fees can vary depending on your specific construction project:

• House & Land Packages: These typically have standard fee structures as they involve registered builders and fixed price contracts.

• Custom Home Finance: Building a custom design may involve higher valuation and inspection fees due to the unique nature of the project.

• Owner Builder Finance: If you're an owner builder, expect more stringent inspection requirements and potentially higher fees, as lenders view these as higher risk.

• House Renovation Loan: Renovation projects may have different fee structures, particularly for progress payment finance on smaller projects.

• Off the Plan Finance: Purchasing off the plan has its own fee considerations, particularly around timing and valuation.

Managing Your Construction Loan Costs

While construction loan fees are largely unavoidable, you can take steps to minimise overall costs:

1. Compare fee structures across different lenders - some offer more comprehensive packages with fewer individual charges
2. Ensure all council approval and development application requirements are met before applying to avoid delays and extension fees
3. Work with a Renovation Finance & Mortgage Broker who understands construction funding nuances
4. Plan your Progressive Payment Schedule carefully with your builder to avoid unnecessary drawdowns
5. Consider making additional payments during construction if your loan allows, to reduce overall interest costs
6. Ensure your fixed price building contract is clear about progress payments to align with your lender's requirements

Why Professional Guidance Matters

Whether you're pursuing a project home loan, spec home finance, or custom home finance, understanding the complete fee structure helps you budget accurately for your build. Construction finance involves more complexity than standard home loans, and working with experienced professionals ensures you're fully informed about every cost involved.

At Law Home Loans, we help Canterbury clients understand the complete picture of construction loan fees and identify suitable lenders for their specific project, whether it's a land and build loan, home improvement loan, or quality construction of a new home.

Building your new home is a significant investment, and knowing exactly what fees to expect removes uncertainty from the process. Call one of our team or book an appointment at a time that works for you to discuss your construction finance needs and get clarity on the costs involved in bringing your building dreams to life.