Construction Loans—Down Payment


A construction loan is a loan that is used to finance the build of a real estate property such as a home.  It is generally a short-term loan and is sometimes referred to as a self-build loan, or construction-to-permanent loan.  They are loans with varied interest rates.  The loan is generally used for the renovation of a property or new build.  The loan is not taken out by the one doing the construction but by the owner.

When you apply for this type of loan, you will need to put up a down payment.  The amount you will need to pay depends on three things.

  • Construction cost– this is the easy part to figure out. It is the proposal that you have received from your builder as to what they will charge to do the work.  This is why it is important to work with a builder that is trustworthy and known to do quality work.  You want to be sure that you have a detailed, itemized price appraisal that is accurate and will help to protect you from the price increase due to the costs of materials increases.
  • The appraised value of the home you are building—this is determined by an independent third-party appraiser. The lender is the one that orders the appraisal.  The appraisal is the number that will determine the value of your home once it is done.  The appraisal will give your lender security that they will be able to get their investment back if they have to sell the house if you cannot repay the loan.

The third thing that filters into the down payment is the amount of the construction loanThe amount you would receive is a percentage of the appraised value of the finished home.  For example, if the finished home is appraised for $500,000, the lender may lend you 95% of the appraised value, which would be $475,000.

Get the amount of your down payment, which will be what the construction costs are, or what the lender is willing to loan you, minus the appraised value of the home.  The appraised value of the home was $500,000 and the lender is willing to loan you $475,000 so the difference between the two is $25,000.  That would be your down payment.

If you are having trouble securing a loan, you can enlist the services of a mortgage broker Sydney as they have the knowledge and experience to find a lender for you.  This type of loan is what is used to cover the payments to the builder during the building process.  When your home is being built, the lender is the one that will pay the builder in increments instead of giving the entire amount of the loan.


If you are not satisfied with your lender and the amount they want to lend, talk to a mortgage broker as they have more lenders they can contact and they will also help you through the process if you do not want to do it on your own.