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A construction loan is a specialised lending option available for new home builds and renovations.
Unlike regular home loans where you typically receive a lump sum of the loan amount at settlement, construction loans are paid via progressive drawdowns/progress payments, where a portion of your loan funds are released at each stage of construction.
A construction loan will usually be interest only over the first 12 months and then revert to a standard principal and interest loan.
Some lenders will ask for the builder’s invoice at each stage of construction and send a valuer to check the work has been completed to an acceptable standard, before releasing the next payment. As the loan is being progressively drawn down, interest and repayments are calculated based only on the funds used. For example, if by the third progressive payment, only $150,000 has been drawn down on a $300,000 loan, interest would only be charged on $150,000.
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