When building a house, when do you start paying the mortgage?

When you buy an existing property, your mortgage will be for the majority of the purchase price, which will be paid to the seller when the sale is finalised. Once this occurs, you’ll be required to begin repayments. However, when you build a home, the lender does not make a single payment all at once - after all, there is nothing to pay for yet. 

Your builder or construction company will provide a schedule describing the stages in which your property will be built. Most have five stages:

• SLAB: The concrete slab is laid. Approximately 15-20 per cent of funds paid (may include a 5 per cent deposit to the builder)
  
  
• FRAME: Exterior frames are built and brickwork is completed. Electrical, plumbing, gutters and insulation are installed. Approximately 20 per cent of funds paid
  
  
• LOCK-UP: Remaining windows, doors, external walls and roofing are installed so the home can be effectively locked up. Approximately 20 per cent of funds paid
  
  
• FIT-OUT: Internal fittings and fixtures are completed at this stage including lights, powerpoints and other plumbing. Approximately 30 per cent of funds paid
  
  
• COMPLETION: When contracted items are finalised including fencing and site clean-up, final detailing and painting works are carried out. The bank or their valuer will inspect at this stage before making the final progress payment of approximately 10 per cent of funds.

And at specific intervals during the build, your lender will make payments after you sign off that the work has been done. For instance, most lenders will pay out the construction loan in four instalments. This often starts with the purchase of the land and then at different stages of construction, with a final payment once the build is complete.  

If you take out a loan that includes the purchase of land and construction of your property, you’ll need to check when repayments start. Lenders will make a lump sum payment for the land, and they may then expect you to begin repayments. You’ll want to ensure you understand these repayment terms before you sign any contracts for the build or the mortgage. 

Your budget may not be able to handle both mortgage repayments and rent during the construction phase, so be sure to speak to your lender about this. If you do have the finances to support both, you may also consider putting a little more towards the loan when you can to help balance your finances.

Some lenders may require you to make repayments even while the construction is ongoing. This may be more likely to happen if you’ve borrowed money to buy the land as well. If this is the case, you can check if the lender will factor in your rent payment when deciding the minimum amount you need to repay during the construction of your home. 

More commonly, lenders may give you the option of paying only the interest on the amount borrowed while you’re also paying rent and switch to principal-plus-interest payments once you actually move in. 

Although the idea of paying interest only is attractive because your repayments are smaller, it also means you’re not actually repaying any of the money you borrowed. If you have the financial capacity to cover more of the upfront costs like the purchase of the land it will help you in the long term. Even if you’re not able to cover these large amounts and need to borrow them, you could also see if the lender will allow additional repayments to help you repay some of the principal even if you’re only required to pay the interest. 

It’s also worth noting that construction loans are typically variable interest rate loans and you should ensure you have room in your budget for possible rate increases. It’s often advised to calculate into your budget an increase of one per cent on top of your interest rate to help you manage changing interest rates. 

It’s also worth comparing construction loans from different lenders to find a deal that’s most suitable for you.