What are home construction loans and when should you get one?

Whether you want to take on a new challenge, like the idea of living in a home exactly tailored to you, or are simply having trouble finding something you love in your area, your thoughts may have turned to construction. Building your own home is a way to ensure you can move into your ideal place. However, it does come with a whole different kind of financing – the home construction loan.

Hamburg - You can finance your new build home with a lender, but it's not the same as a mortgage.

What are home construction loans?

A home construction loan or house building loan is a short-term loan that enables you to finance the construction or renovation of your property.

It’s characterised by higher interest rates and, unlike the kind of loan you get when you buy a property, it’s based on the predicted value of your home once the work is finished rather than its current market value.

In the EU these kinds of loans are particularly aimed at encouraging energy-efficient construction and renovation, so if you’re building in Europe, you’ll want to bear this in mind as you plan the work.

Types of home construction loans

There are three main types of loans to choose from.

Construction-only loans

With a construction-only loan, you pay back the full amount of the loan on completion of the work. This is a good option if you have a large amount of capital at your disposal, or if the projected sales value of your current property is equal to or greater than the cost of the new build.

Construction-to-permanent loans

Getting a construction-to-permanent loan means having a firm schedule of work in place before you begin. With this type of loan, your lender pays the construction team as the project progresses, and the entire cost of the loan then becomes a mortgage once the house is complete.

Renovation construction loans

With this type of house building loan, you’ll be looking to renovate an existing property rather than build a new one. You can often get government-funded loans for this kind of project, with the repayments becoming part of your mortgage along with the cost of purchasing the property in the first place.

How to get home construction loans

In many cases you’ll find that you need to have an excellent credit score and up to 25% of the projected cost of the construction upfront. Therefore, taking stock of your finances and doing some detailed costing is essential.

It’s also necessary to have a timeline and stick to it as closely as possible, because most lenders will pay out the loan in instalments that correspond to the work schedule. This means they are likely to carry out inspections and liaise with your builder before approving each instalment.

Finding a builder you trust and evaluating them thoroughly prior to hiring them is also a must, even more so than usual. Since they will be in control of your construction schedule, your loan instalments may hinge on their professionalism and timeliness.

With the proper investment consulting and property insight, home construction loans can be an investment in your financial future. Taking into account the projected value of your finished home and all the ways you can maximise this, you can create an asset that only grows in value, by building the right sort of home in the right place and in the right way.

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