11 Apr 2022

Do Construction Loans Require a Deposit?

Down Payment for Construction Loans

Lenders help owner-builders and investors finance their construction projects. However, it’s important to understand that construction loans differ from mortgages. For example, most lenders will finance between 60% to 80% loan-to-value ratio for these projects. They rarely finance 100%. Therefore, placing a down payment for construction loans becomes important. 

Owner-builders and investors will place two down payments during the project. To improve your loan terms, consider placing a 20% deposit toward the loan. Collateral or home equity become acceptable substitutes in some cases. You can also try bringing in a guarantor to the table.

When the financing goes through and you have hired your building crew, they will expect between a 5% to 6.5% deposit for their work. Thus, prepare your finances accordingly. 

Although lenders finance construction projects, the projects pose a high risk for the lenders. In Australia, most construction projects reach the finish line. However, they might experience delays or require more financing. 

Keep in mind that the loan term for the project only lasts the length of the project. It takes between six to 12 months to complete new homes or multi-unit structures. The loan becomes due when builders declare the project complete. Therefore, it’s important to remain under budget and on top of your finances. 

Individuals can use our Mortgage House home loan calculator with no strings attached.

Down Payment for Construction Loans Conclusion

All borrowers benefit from placing a down payment on their loan. A down payment for construction loans improves the loan terms for owner-builders and investors. Contact our Mortgage House loan specialists to obtain more information.

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