Understanding the Costs of Construction Loan Fees

Building a new home is an exciting journey, but understanding the fees associated with construction finance can feel overwhelming. As a public servant, you'll want to know exactly what costs to expect when securing a building loan. Let's break down the various construction loan fees you might encounter and what they mean for your project.

What Makes Construction Finance Different?

Unlike standard home loans where you receive the full loan amount upfront, construction funding works differently. Lenders only charge interest on the amount drawn down, which means you're not paying interest on the full loan amount from day one. This structure helps manage your cash flow during the building process, but it does come with specific fees.

When you access construction loan options from banks and lenders across Australia, you'll notice that funds are released in instalments according to a progress payment schedule. This progressive drawdown system requires inspections at various building stages, which brings us to one of the key fees you'll encounter.

Progressive Drawing Fees Explained

The Progressive Drawing Fee (sometimes called a progress inspection fee) is charged each time the lender releases funds to your registered builder. Here's how it typically works:

• Your builder submits a claim for payment based on completed work
• The lender arranges a progress inspection to verify the work
• Once approved, funds are released according to the construction draw schedule
• A fee is charged for each inspection and drawdown

These fees usually range from $200 to $500 per inspection, and most construction projects require between four to six drawdowns. For a typical house & land package or custom home finance arrangement, you might expect anywhere from five to seven progress payments throughout the building process.

Application and Establishment Fees

When you submit your construction loan application, you'll likely encounter an application fee. This covers the lender's costs in assessing your loan, reviewing council plans, verifying your development application has council approval, and ensuring your fixed price building contract meets their requirements.

Establishment fees (also called settlement fees) are charged when your loan is approved and settled. These can range from a few hundred dollars to over $1,000, depending on the lender and loan amount. Some lenders waive these fees as part of promotional offers, so it's worth discussing with your broker.

Interest Costs During Construction

While construction loan interest rates might be similar to standard home loans, the way interest is calculated differs. During the building phase, most construction loans operate on interest-only repayment options. This means:

• You only pay interest on funds already drawn down
• As each progress payment is made, your interest charges increase
• Once construction completes, the loan typically converts to a construction to permanent loan with principal and interest repayments

For example, if your total loan amount is $500,000 but only $200,000 has been drawn down, you'll only pay interest on the $200,000. This can significantly reduce your costs during the construction period compared to borrowing the full amount upfront.

Valuation and Legal Fees

Before approving your building loan, lenders require a valuation of both the suitable land and the proposed construction. Unlike buying an existing property, construction valuations are more complex because they assess:

• Current land value
• Estimated value upon completion
• Quality of construction based on plans and specifications
• The builder's experience and financial stability

Valuation fees for land and construction packages typically range from $300 to $800. You'll also need to factor in legal fees for reviewing contracts, particularly your fixed price contract with the builder.

Builder-Related Requirements and Costs

Most lenders require you to commence building within a set period from the Disclosure Date, often within six to twelve months. If you're considering owner builder finance, be aware that additional fees and higher interest rates may apply due to the increased risk.

Your lender will want to verify that your registered builder has:

• Appropriate licences and insurance
• A solid track record of quality construction
• Financial stability to complete the project

Some lenders charge fees to verify builder credentials and review cost plus contracts or fixed price contracts.

Fees for Specific Construction Types

Different construction projects may attract different fee structures:

House renovation loan: May require additional inspections if the scope involves significant structural changes, meaning more inspection fees.

Spec home finance or off the plan finance: These might have different fee arrangements as the building process is already underway.

Custom design projects: Could attract higher valuation fees due to the unique nature of the build.

Project home loan arrangements: Often have more standardised fees as the designs are proven and familiar to valuers.

Additional Costs to Consider

Beyond the standard construction loan fees, budget for:

• Building insurance during construction
• Council fees for development applications and building permits
• Costs for variations to plans or upgrades
• Professional fees for architects or designers
• Charges for paying sub-contractors like plumbers and electricians if you're coordinating trades

Managing Your Construction Finance Costs

To keep fees manageable, consider these approaches:

1. Discuss fee structures upfront: Ask your renovation Finance & Mortgage Broker to compare fee structures across different lenders
2. Understand your Progressive Payment Schedule: Fewer drawdowns mean fewer inspection fees, though this needs to balance with your builder's cash flow requirements
3. Review your building contract: Ensure your progress payment schedule aligns with typical lender requirements
4. Budget for contingencies: Set aside funds for unexpected costs or additional payments that might arise

As specialists in construction loans for public servants, we understand that building your dream home involves careful financial planning. Whether you're pursuing new home construction finance, a house & land package, or renovating your house, understanding all the associated fees helps you budget accurately.

Public servants often have access to specific lending benefits, and at Public Home Loans, we work with you to access construction loan options that suit your circumstances. Similar to how we help with home loans for public servants and buying your first home, our construction finance expertise ensures you're well-informed throughout the process.

Building a new home represents a significant investment, and the fees associated with construction finance are part of that investment. By understanding what to expect and planning accordingly, you can focus on the exciting aspects of bringing your custom home to life.

Call one of our team or book an appointment at a time that works for you to discuss your construction finance needs and receive tailored advice on managing construction loan fees.