Financing of a new property has its own rules, particularly regarding the release of funds. We detail here the main stages of Construction loans, focusing mainly on the interim costs and their impact on the total cost of the loan.
Table of Contents
Construction: From Project To Financing Requirement
Before applying for a construction loan, the first step is the same as for any project to purchase an old property. Therefore, it is essential to define your project and determine your actual financing needs precisely. You can use a loan repayment calculator to help you.
The Project Itself: where do you want to build? What type of house does you like (surface area, number of bedrooms, materials, technologies)? Do you have land that you already own? Then, depending on your project and your desires, you can determine an initial financial envelope.
The Need For Financing: do you have a personal contribution? How much can you borrow concerning your income and the charges on your household? First, a study of your situation is necessary to narrow down the amount you can benefit from. Then, with your idea of construction in mind and a first simulation of the required sum, you can begin your steps. And thus, seek financing from your current bank and via a mortgage broker to benefit from a vision of the entire market. Then, as is the case with a traditional mortgage, you can borrow an amount consistent with your debt ratio and your borrowing capacity via a construction loan.
The financial arrangement is essential and must be arbitrated by yourself, according to the recommendations received by your financial advisor or your credit broker.
The Methods Of Repayment Of The Construction Loan
There are several possible repayment methods for a construction loan to construction lenders. Depending on your financing plan, debt capacity, and investment strategy, you can opt for immediate repayment as soon as the work begins or deferred repayment when you enter the home.
Immediate Reimbursement
You ask a bank to obtain Construction loans. Once a positive response has been received and the work has started, the credit repayment begins.
With immediate repayment, you must always honour your current rent or monthly loan payment. You must therefore have significant financial resources to cope with these possible double-monthly payments. What is the advantage of this immediate reimbursement? You start to amortize from the first monthly payments and repay the capital, even though the property is not finished—a real saving of time and a saving on the total duration of the repayment.
Deferred Reimbursement
Banks are offering to defer loan repayments to help borrowers meet their housing charges while their house is being completed. Two options are possible: entirely postpone the repayment (capital and interest) or only the share of capital.
Deferred Reimbursement In Full
You do not begin the repayment of the mortgage until the home has been delivered. This date may coincide with your entry into the accommodation or approach it if work is still necessary. Repayment begins when all calls for funds have taken place. The advantage is straightforward; you do not have to bear the burden of credit when you are not living in your new home. In return, the main drawback of this solution lies in the induced offset. You postpone the repayment and “waste” time by not starting the amortization as soon as possible.
Deferred Reimbursement With Interim Costs
It is possible to defer the repayment of the capital and start paying the total monthly payments at the time of delivery of the property. But as the construction progresses and the calls for funds follow one another, you begin to pay the interest on the loan. They are calculated at the mortgage rate and paid until the complete release of the credit.
Construction loans are a financing tool that can be adapted to all projects. Cumulative with specific aids and devices, your construction loan deserves your full attention to choose an offer at the best rate and with the best possible conditions. Take the time to educate yourself and “build” your project, step by step.
