Understanding Deposits for Builders

Congratulations! You’ve decided to embark on an exciting journey – building your dream home. But before the hammers swing and the sawhorses appear, there’s the crucial first step: securing a construction loan. Unlike traditional mortgages, construction loans come with specific deposit requirements that builders should be aware of.

This article aims to clear up any confusion about down payments for builders seeking construction loans in Australia.

Higher Hurdle: Understanding Deposit Requirements

Be prepared for a slightly steeper climb when it comes to construction loan deposits compared to standard mortgages. The minimum deposit typically starts at 5% of the projected property value. However, there’s a catch – to qualify for this minimum with most lenders, you’ll likely need Lender’s Mortgage Insurance (LMI).

LMI protects the lender if you default on the loan. While it allows you to access a home loan with a lower deposit, it adds an extra cost to your overall borrowing.

Deposit Options for Builders: Land vs. Project Cost

Here’s where things get interesting for builders. The deposit you need can vary depending on what stage of the project you’re financing. Let’s break it down:

  • Land Purchase: If you’re only financing the land purchase initially, the deposit might be closer to a standard mortgage deposit, potentially around 5-20% depending on the lender.
  • Total Project Cost: When financing the entire construction project, including land and building costs, the deposit requirement jumps to a minimum of 5%, but with LMI typically needed. Some lenders may even require a higher deposit, reaching 20% or more to avoid LMI.

Key Takeaway: Plan Your Finances Accordingly

Building your dream home requires careful planning, and that includes securing the right financing. By understanding the higher deposit requirements for construction loans, especially the difference between land purchase and total project cost, you can be better prepared for the loan application process.

Next Steps: Talk to a Broker

Construction loan options and deposit requirements can vary between lenders. Consulting a qualified mortgage broker can be invaluable. They can help you navigate the different options, find the best fit for your situation, and ensure you have a clear understanding of the deposit requirements before you move forward.