Building a brand new home is a fun and exciting time.

However, it can also be extremely stressful, with lots of complex decisions to be made, such as what type of kitchen and bathroom fittings are best, and what the colour palette you should choose.

Home buyers enjoy a wealth of choices when it comes to creating their own home. Making it unique to you and putting your personal stamp on the home makes is special. You can choose to build a new home from scratch, buy ‘off the plan’, renovate an established home or, even more drastic, demolish an existing home and rebuild. You may even be considering a sub-division and building two or more units or townhouses on the property.

Each option has its own set of pros and cons, and it pays to consider your choices carefully, because whatever your choice, it’s a fair bet it involves a sizeable financial commitment.

There are many choices for how you can build your home, and just as many options for a construction loan, but I can help you navigate these options to ensure you get the best fit for you.

Building a new home

There’s something very exciting about choosing a piece of land, deciding your preferred style of home and watching it take shape over time. At the top end of the price scale, you can choose to have an architect design a one-off home that truly reflects your tastes. However, for sheer simplicity and value, it can be hard to go past a house and land package offered by a major developer. Lenders will ask for a fixed-price contract before they will provide finance, which house and land packages tend to come with that include all major costs.

Buying off the plan

Buying off the plan refers to the process of buying a property – often an apartment – which has not yet been constructed. One of the big pluses of buying off the plan is the potential savings on stamp duty, which may be based on land value only. In addition, you may have to put down only a small deposit, potentially as little as 5-10% of the purchase price, with the balance payable on completion.

Renovating or demolishing an established home

If you’ve been in your home for a while and you love the place but feel that you need more space, or maybe your home needs updating, renovating your home could be far cheaper than selling and buying a new home. Alternatively, you may be planning to buy an affordably priced ‘renovator’s delight’ that you plan to refurbish before you call it ‘home’.

Whatever the case, before you start looking at paint charts and carpet swatches, it is worth seeking the advice of a licensed builder or architect about the likely cost of your renovations. Home improvement projects have a habit of running beyond the initial budget. Speak to a local real estate agent as well to ensure you won’t fall into the trap of overcapitalising (where the cost of the renovation outweighs the value it adds to your home).

Sub-dividing and rebuilding

This is becoming more popular as Australia’s population continues to grow and density in the major cities continues to increase. Investors may be drawn to the idea that you can split the established property into two or three lots, build new homes and then earn rental income. The outlays in this instance are much larger than buying an established property and renting it out immediately, however there may be the opportunity for more rental income and greater capital growth.

However, there is a lot of homework to be done first and you may need to engage professionals such as surveyors, engineers, town planners, architects and legal advisors. And you will also need to apply for the necessary permits from local councils.

Construction Finance

If you are looking at a renovation, then there are a few options available. You may be far enough ahead in your existing loan to consider a re-draw. Or you might want to consider a loan top-up, if you’re happy with your existing lender. Otherwise you might wish to consider a refinance with a new lender, adding the additional funds required to your new mortgage, provided your can service the new debt and you have sufficient LVR.

If you are building a completely new home, then you will need a construction loan. Unlike a traditional home loan where the funds are made available to borrowers in a single lump sum, a construction loan lets you draw on the loan balance when payments need to be made to your builder at certain stages. These payments are known as progress payments. Think of it as a ‘drip feed’ of funds to meet ongoing costs as construction work progresses.

While work is still progressing, your lender will require you to make repayments of interest on the money that has been drawn down. So, at the start of your loan, you can expect small repayments, and these will gradually increase as your building project nears completion.

It means you aren’t paying interest on money you haven’t used as you would with a traditional home loan, so with a construction loan your repayments should be far lower until your project is complete.

Construction loans normally have a variable rate and in general you can expect a maximum Loan to Valuation Ratio (‘LVR’ – the amount of your home loan compared to the value of your home, expressed as a percentage) of 95%. This is something worth speaking to your Mortgage Choice broker about, as the situation varies widely between lenders.

Lenders often set a maximum timeframe for the complete draw down of your loan, usually within 6 months. If you are not planning to build until later, the land may need to be purchased separately under a land loan