Construction Loans for New Buildings
Erecting a new building of any type is expensive and is a cost usually way outside the cash reserves of most people. Even major property developers, rarely have access to all of the necessary funding for a new development. So construction loan finance is the solution to the knotty problem of having sufficient funding to build the structure you want.
This can range from a major retail development, through a showroom for your company to a large residential house. All types of self-build project need finance and so construction financing is the most common way forward.
What is construction finance?
If you are buying a building, whether it is a house to live in, an office to work from or a factory to lease out, most people will finance that by way of a mortgage. The mortgage provider will take a secured charge over the title of the property so in case you default on your payments, they can claim the building for themselves. They will then look for a buyer at a price to cover their loan principle.
With a new building project, there is no building in existence for the financier to take a charge over so this raises issues of security for the lender. What will be the collateral in case of non-payment of the loan or interim payments?
A construction loan is any loan whose proceeds are used to defray the expenses of any kind of construction. It is designed to facilitate the borrower to complete the construction of a home or other building project. Construction loan financing is a short term method of arranging for the necessary funds to facilitate construction.
This can range from a major retail development, through a showroom for your company to a large residential house. All types of self-build project need finance and so construction financing is the most common way forward.
What is construction finance?
If you are buying a building, whether it is a house to live in, an office to work from or a factory to lease out, most people will finance that by way of a mortgage. The mortgage provider will take a secured charge over the title of the property so in case you default on your payments, they can claim the building for themselves. They will then look for a buyer at a price to cover their loan principle.
With a new building project, there is no building in existence for the financier to take a charge over so this raises issues of security for the lender. What will be the collateral in case of non-payment of the loan or interim payments?
A construction loan is any loan whose proceeds are used to defray the expenses of any kind of construction. It is designed to facilitate the borrower to complete the construction of a home or other building project. Construction loan financing is a short term method of arranging for the necessary funds to facilitate construction.
Interest on this method of financing will depend on the viability of the project and the credit scores of the borrower, or reliability of the company asking for such a loan. In most cases, the interest for the period of the loan is added on to the loan amount and is kept as a reserve from which the lender can claim monthly payments. Most lenders also add on contingency amounts to the loan amount, so that any extra funds required are available to the borrower and do not hold up the construction.
Typically, the repayment of the loan is due immediately after the construction is completed and the borrower gets permission for occupying the property. In most cases, lenders then agree to convert this amount into a permanent loan, like a mortgage, using the equity of the completed construction as the asset that safeguards the loaned amount. Many lenders agree to combine the two, in order to save the borrower extra cost on settlement and extra fees for the new loan. However, this may lock in the borrower at interest rates that may not be advantageous. Many borrowers arrange for permanent financing before they apply for construction loans or at least part way through the project.
In many cases of financing construction loans, the full amount of the loan is not disbursed immediately, and will follow the progress of the construction. These are known as stage payments.
This allows the lender to monitor the construction and ensure that the loaned money is actually being used for construction. For the builder, whether it is a construction loan for property development or an individual, it makes it easy to allocate funds for contractors and suppliers who will be paid after work is completed or material supplied. Negotiating proper payment terms can help the builder to complete the construction easily without finance ever becoming a hurdle.
The amount of loans that a lender will agree to give can depend on credit score, land equity if any, and the perceived risk. Interest rates can also vary depending on the project and the borrower. Interest rates also vary depending on the stage of construction, though options are available to avail of fixed rates.
As an example, if you are building a single stand alone medical facility, is it in an area that needs this type of building? This is also totally dependent upon one tenant. Alternatively if you have a medical suite with offices for a number of medical professionals, the risk is spread and so the interest rates will likely be lower.
Construction loan financing allows a homeowner or property developer to construct a building on favourable terms. As repayment of loans has to be completed as soon as the home is signed off for occupancy, the building owner must make sure that there a mechanism in place to make this repayment. This might even mean using the property to create a long-term mortgage.
Compare loan rates from various lenders before you decide on any construction loans. Also, make sure that you have all other arrangements in place, including the necessary consents, to complete the construction without any hindrances. Any delay in construction loans for new buildings is expensive so be sure to have all the preparatory work completed at an early stage.
Typically, the repayment of the loan is due immediately after the construction is completed and the borrower gets permission for occupying the property. In most cases, lenders then agree to convert this amount into a permanent loan, like a mortgage, using the equity of the completed construction as the asset that safeguards the loaned amount. Many lenders agree to combine the two, in order to save the borrower extra cost on settlement and extra fees for the new loan. However, this may lock in the borrower at interest rates that may not be advantageous. Many borrowers arrange for permanent financing before they apply for construction loans or at least part way through the project.
In many cases of financing construction loans, the full amount of the loan is not disbursed immediately, and will follow the progress of the construction. These are known as stage payments.
This allows the lender to monitor the construction and ensure that the loaned money is actually being used for construction. For the builder, whether it is a construction loan for property development or an individual, it makes it easy to allocate funds for contractors and suppliers who will be paid after work is completed or material supplied. Negotiating proper payment terms can help the builder to complete the construction easily without finance ever becoming a hurdle.
The amount of loans that a lender will agree to give can depend on credit score, land equity if any, and the perceived risk. Interest rates can also vary depending on the project and the borrower. Interest rates also vary depending on the stage of construction, though options are available to avail of fixed rates.
As an example, if you are building a single stand alone medical facility, is it in an area that needs this type of building? This is also totally dependent upon one tenant. Alternatively if you have a medical suite with offices for a number of medical professionals, the risk is spread and so the interest rates will likely be lower.
Construction loan financing allows a homeowner or property developer to construct a building on favourable terms. As repayment of loans has to be completed as soon as the home is signed off for occupancy, the building owner must make sure that there a mechanism in place to make this repayment. This might even mean using the property to create a long-term mortgage.
Compare loan rates from various lenders before you decide on any construction loans. Also, make sure that you have all other arrangements in place, including the necessary consents, to complete the construction without any hindrances. Any delay in construction loans for new buildings is expensive so be sure to have all the preparatory work completed at an early stage.