Do you know the risks with Construction Loans?

Construction loans offer SA Ambulance Service employees an opportunity to build their dream home from the ground up. However, like any financial product, construction loans come with specific risks that require careful consideration. Understanding these risks before applying for a loan can help you make informed decisions and protect your financial future.

Understanding Construction Loan Basics

Construction loans differ significantly from standard home loans. These specialised loans typically feature a progressive drawdown system where you only charge interest on the amount drawn down at each stage. This means you'll make interest-only repayment options during the construction phase, with instalments increasing as more funds are released.

Lenders across Australia access Construction Loan options from banks and lenders with varying terms and conditions. The loan amount is released through progress payments aligned with construction milestones, and lenders typically require an 'as if complete' valuation before approval.

Timeline and Completion Risks

One of the most significant risks involves construction delays. Most lenders require you to commence building within a set period from the Disclosure Date, typically 6-12 months. Weather conditions, council permit delays, or contractor availability can extend your build timeline beyond expectations.

Delays create several financial pressures:

• Extended interest-only payments on funds already drawn
• Potential rent payments if you've sold your previous home
• Additional payments for project variations
• Progressive Drawing Fees accumulating over longer periods

To mitigate these risks, make a plan with realistic timeframes and build contingency periods into your construction schedule.

Budget Blowout Concerns

Construction projects frequently exceed initial budgets. Fixed price contracts provide some protection, but Out of Contract Items not included in your original agreement can quickly escalate costs. Common budget overruns include:

• Unexpected site conditions requiring additional groundwork
• Changes to council plans and permits mid-construction
• Premium finishes and upgrades
• Additional costs for plumbers, electricians, and other specialists
• Council restrictions requiring design modifications

Interest Rate Fluctuation Impact

Construction loans often feature variable interest rates, meaning your repayments can change throughout the build process. SA Ambulance Service employees should consider how interest rate increases might affect their budget over the 12-18 month construction period.

Unlike standard home loans, you cannot lock in rates for the entire loan amount from day one since funds are released progressively. This exposes borrowers to potential rate rises during various stages of the project.

Builder and Contractor Risks

Working with unregistered or financially unstable builders poses significant risks. Always ensure your registered builder has:

• Current licensing and insurance
• Solid financial backing
• References from recent projects
• Clear contracts outlining payment schedules

Builder insolvency during construction can leave projects incomplete and borrowers liable for additional costs to engage new contractors.

Council and Regulatory Challenges

Council regulations can change during your build, affecting:

• Development application approvals
• Building permit requirements
• Environmental assessments for suitable land
• Heritage or bushfire overlay considerations

These regulatory changes may require design modifications, impacting both timeline and budget.

Valuation and Equity Risks

Construction loans rely on projected completion values. If the property market declines during construction, your finished home might be worth less than anticipated. This can affect:

• Your ability to refinance to a standard home loan
• Equity position upon completion
• Future borrowing capacity

Planning for Major Home Renovations vs New Builds

Whether you're planning major home renovations, buying off the plan, or starting a new build on suitable land, each option carries different risk profiles. Renovating your house might seem less risky, but structural surprises can be costly.

Some SA Ambulance Service employees choose to demolish existing property for new builds, while others prefer house & land packages for more predictable outcomes.

Protecting Yourself as an SA Ambulance Service Employee

As healthcare workers, SA Ambulance Service employees often have stable income that appeals to lenders. However, shift work and overtime variations can complicate income assessment during the construction loan application process.

Consider these protective strategies:

• Maintain larger cash reserves for unexpected costs
• Choose reputable builders with strong track records
• Review all contracts thoroughly before signing
• Consider construction insurance beyond standard requirements
• Plan for potential income changes during construction

Working with Specialised Mortgage Brokers

Construction loans require expertise that general mortgage brokers may lack. A renovation Mortgage Broker understands the complexities of progressive payment schedules and can help you access Construction Loan options from multiple lenders.

Specialised brokers can also assist with home loan refinancing once construction completes, potentially securing more favourable terms for your permanent mortgage.

Construction loans can help SA Ambulance Service employees achieve their homebuilding goals, but understanding the risks ensures you're prepared for challenges that may arise. Proper planning, realistic budgeting, and professional guidance can help minimise these risks and protect your financial interests throughout the construction process.

Call one of our team or book an appointment at a time that works for you to discuss how we can help with your construction loan needs.