How-to-finance-a-construction-loan

How to finance a land and building package

Typically, financing a land and building package is done one of three ways. This article will explain the ins and outs of each strategies. It’s important that you take into account your individual circumstances and seek financial advice before you make a decision about what is right for you.

Purchase the land with a mortgage

When you purchase vacant land, you may be required to build within a 3-year period. This means you have up to three years to pay down as much of the mortgage on the land as possible. As you have already purchased the land and obtained and payed off some of the mortgage. You are going to have more financial room to organize a construction loan. You should note that construction loans have higher interest rates than a traditional home loan. This is because the risk of the loan is measured against the general risk of not completing the build.

Construction Loan

You can generally borrow up to 95% of the value of the home once it has finished being built.  Construction loans draw down on the perceived value of the build, hence why their interest rates are higher. Many people wait on obtaining a construction loan in order to avoid being crippled by the interest of the mortgage on the loan and the construction loan simultaneously.

Turn-key Land and Construction Loan

These ‘Turn-Key’ loans are rather expensive, this is because you are borrowing to build on new land with a house and land package. These house and land packages can be expensive. Considering the interest rates on the construction loan and the mortgage on the land, it can be very expensive during the building period. However, once it’s built you can refinance.