Common Mistakes With Extension Loans in Richmond

An extension is funded in stages, so your loan needs to be built around the way the work will be paid for.

For Richmond homeowners, an extension may be funded with a construction loan or by borrowing against your equity, depending on the project and the lender. A construction loan releases money as the builder completes each stage. The mistakes below tend to appear before the first shovel hits the ground.

How Does an Extension Construction Loan Work?

An extension construction loan releases funds in stages as your registered builder completes agreed work, instead of paying out one lump sum. Many lenders require a progress check or inspection before releasing each payment, but requirements vary and may involve fees. Confirm this with your lender.

Each lender sets its own rules on the number of drawdowns, the repayments during the build, time limits, inspections and fees. That is why two loans with a similar construction loan label can behave very differently once building starts. Comparing those terms across lenders before you apply is where a broker adds real value.

Mistake One: Borrowing Only for the Building Quote

A loan amount based only on the builder's price often falls short, because extensions carry costs outside the contract. Plans, permits, site clean-up and landscaping repairs can all sit outside the quote.

Before you lodge a construction loan application, add up the whole project. That includes council approval and building permit costs, design fees, and a buffer for variations. Asking for a larger loan amount has a trade-off, since you repay interest on whatever you draw. Still, finding a shortfall halfway through a build is usually more costly and stressful than planning a buffer from the start.

If you are unsure how much the lender will allow, check your borrowing capacity first. Banks assess new borrowers at a rate at least 3 percentage points above the loan rate, so your repayments are tested at a higher figure than you will actually pay.

Construction Draw Schedule: What You Pay During the Build

During the build, your repayments generally follow the amount you have drawn. The repayment type during the build, including whether interest-only is available, is set by each lender, and repayments generally start once you begin drawing down. Confirm how yours works.

As an illustrative example, consider a Richmond homeowner who borrows $200,000 for a rear extension. The example uses a rate of 6.75% p.a., which is an illustration only and not a current offer, and assumes interest-only repayments during the build.

• After the deposit and early stages, $60,000 has been drawn. Interest-only repayments on that amount come to about $337.50 a month.
• At a later stage, $140,000 has been drawn. Repayments rise to about $787.50 a month.
• When the extension is finished and the full $200,000 is drawn, interest-only repayments are about $1,125 a month.

Many construction loans convert to principal and interest at the end of the build, but the timing and term depend on your lender and contract. If it converted over 30 years at the same 6.75%, repayments on the $200,000 would come to roughly $1,297 a month. Confirm your lender's terms before assuming that figure. Planning for a final figure like this, and not just the lower early repayments, helps avoid surprises when the loan switches over. The trade-off is that interest-only repayments during the build do not reduce the amount you owe. These figures cover the extension borrowing only, so your existing loan repayments sit on top.

You can test your own numbers with the extra repayment calculator.

Mistake Two: Signing the Building Contract Before the Lender Has Reviewed It

Sign a fixed price building contract only after your lender has reviewed it, because the payment schedule in the contract drives how your loan is drawn. If the schedule does not suit the lender, you may need to renegotiate after you are already committed.

In Victoria, Consumer Affairs Victoria guidance says the deposit on a contract of $20,000 or more cannot be more than 5 per cent. It also says payments are made for completed stages, and that a deposit should not be paid until the builder provides a certificate of currency. Lenders look closely at these details, so ask for a pre-contract review before you sign.

It also pays to confirm the builder's registration and to match the contract's stages with the lender's drawdown steps. Many extension owners sit down with a broker at this point because the paperwork has to line up in three places: the contract, the permit and the loan.

Mistake Three: Ignoring the Timing of Approvals

Lenders commonly require the approvals needed for the work, such as any planning permit and the building permit, before they release funds, but requirements vary by lender. A building permit may come from a private building surveyor rather than the council.

Richmond sits in the City of Yarra, so any planning permit goes through that council. Check its current requirements with the council directly, and allow for delays when you set your loan timeline. Some lenders set a time limit to complete construction, so ask your lender when that period starts.

Mistake Four: Using a Standard Loan When Your Equity Could Do the Job

Subject to lender approval, a valuation and a serviceability assessment, you may be able to borrow against your equity to fund an extension without a separate construction loan. That is a new loan with its own costs and risks, and the lender may still set conditions on how the funds are drawn. A construction loan still makes sense when you want staged drawdowns and a lender inspection process.

The right choice depends on your equity, the size of the project and how you want to repay. Looking at refinancing to release equity alongside a construction loan shows you both costs side by side. A loan health check can also show whether your current loan suits the new borrowing. If your plans go beyond an extension, our page on renovating your house covers wider options.

Refinancing may bring exit fees or reset your loan term, so those costs need weighing against any benefit.

The team at Premier Path Finance works with Richmond homeowners on extension finance, and we can help you match the loan to your build. Call one of our team or book an appointment at a time that works for you.

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