Top 10 Construction Loan Fees & Costs to Budget For

Understanding Construction Loan Fees in Australia

Construction loans differ significantly from traditional home loans, particularly when it comes to fees and costs. For principals considering building a new home, major home renovations, or buying off the plan, understanding these fees is crucial for accurate budgeting. Teacher Loans can help you access Construction Loan options from banks and lenders across Australia, ensuring you understand all associated costs before committing.

Unlike standard mortgages where you receive the full loan amount upfront, construction loans operate through progressive drawdown. This means you only charge interest on the amount drawn down at each stage, making the fee structure more complex but potentially more cost-effective.

1. Progressive Drawing Fee

The Progressive Drawing Fee is one of the most significant costs associated with construction loans. Lenders charge this fee each time they release funds during various stages of the project. Typically ranging from $300 to $800 per drawdown, this fee covers the administrative costs of inspecting the work and releasing instalments.

With most construction projects requiring 5-7 progress payments, these fees can accumulate to $1,500-$5,600 over the project duration. Some lenders may offer packages with reduced or capped drawing fees, which can provide substantial savings on larger projects.

2. Valuation and Assessment Costs

Lenders require an 'as if complete' valuation before approving your construction loan. This specialised valuation assesses the property's future value once construction is complete, rather than its current state. These valuations typically cost between $600-$1,200, depending on the property's complexity and location.

Additionally, building inspections at construction milestones may incur separate assessment fees, ranging from $200-$500 per inspection. These ensure work meets required standards before releasing additional payments to your registered builder.

3. Application and Establishment Fees

When applying for a loan, most lenders charge establishment fees covering the administrative costs of processing your application. For construction loans, these fees often range from $600-$1,500, though some lenders waive these fees as part of promotional packages.

The streamlined application process offered by experienced mortgage brokers can help identify lenders with competitive fee structures, potentially saving thousands in upfront costs.

4. Interest Rate Considerations During Construction

Construction loan interest rates often differ from standard home loan rates. During the construction phase, you'll typically pay interest-only repayment options on the drawn-down amount. This interest rate may be higher than the eventual home loan rate, sometimes by 0.25%-1.00%.

Once construction completes, the loan usually converts to a standard home loan with potentially lower rates. Understanding this structure helps principals budget for varying monthly payments throughout the building process.

5. Legal and Documentation Fees

Construction loans require additional legal documentation beyond standard home loans. You'll need contracts with your registered builder, council plans and permits, and a detailed Progressive Payment Schedule. Legal fees for reviewing these documents typically range from $800-$2,000.

Some lenders also charge documentation fees for preparing the loan agreement, usually between $200-$600. These cover the additional complexity of construction loan documentation compared to standard mortgages.

6. Council and Permit Costs

Before commencing building, you'll need various council approvals and permits. Development application fees vary significantly between councils but typically range from $1,000-$5,000 for residential construction. Additional permits for plumbers, electricians, and other trades may cost $100-$500 each.

Council restrictions and regulations can also impact costs if modifications to your plans are required. It's essential to factor these potential variations into your budget when determining the total loan amount needed.

7. Insurance Requirements and Costs

Construction loans typically require comprehensive insurance coverage from project commencement. Home building insurance, covering the structure during construction, may cost $500-$2,000 annually depending on the project value and location.

Public liability insurance may also be required, particularly if you're managing subcontractors directly. While your registered builder should carry this insurance, additional coverage might be necessary for owner-builder projects.

8. Fixed Price Contract Considerations

Lenders generally prefer fixed price contracts as they provide certainty around the total project cost and loan amount. However, Out of Contract Items not included in the original agreement can create additional financing needs and potential fees.

Variations to the original contract may require loan amendments, potentially incurring additional assessment and documentation fees. Careful planning with your builder can help minimise these unexpected costs.

9. Land Purchase Integration

Many principals opt for house & land packages, which may involve coordinating land purchase with construction financing. Some lenders offer integrated solutions, while others require separate transactions, each with their own fee structures.

If you need to demolish existing property before building, additional costs and potential interim financing may be required. The complexity of suitable land acquisition can impact overall borrowing costs and timing.

10. Professional Advisory Costs

Engaging a renovation Mortgage Broker like Teacher Loans can actually save money by identifying lenders with competitive fee structures and helping secure better terms. While broker services might involve costs, the potential savings on interest rates, fees, and loan structuring often far exceed these expenses.

Architectural and design fees, while not directly loan-related, should be factored into your overall project budget to ensure adequate financing.

Making Informed Decisions

Construction loans require careful planning and budgeting beyond the basic building costs. Understanding all associated fees helps principals make informed decisions about their ideal location, price range, and project scope.

Remember, you typically must commence building within a set period from the Disclosure Date, making thorough preparation essential. Working with experienced professionals helps make a plan that accounts for all costs and timing requirements.

Whether you're considering a new build, major renovation, or home improvement loan, understanding the complete fee structure ensures your project stays within budget and proceeds smoothly.

For principals seeking construction financing advice, Teacher Loans specialises in helping education professionals understand their options and secure appropriate funding. Our experience with construction loans for teachers and knowledge of lender requirements can help you make informed decisions about your building project.

Call one of our team or book an appointment at a time that works for you to discuss your construction loan needs and explore the options available to you.