If you need to borrow money to build your home, you'll need to apply for a construction loan. These loans can be set up to allow you to purchase a vacant block of land first and then build on that land within a set timeframe or to fund the construction of your home if you already own the land.
Unlike a regular mortgage, where the lender gives you access to a big lump sum when you take out the loan, a construction loan is set up a little differently. The lender calculates the total amount you'll need to borrow to pay your builder and then allows you to access portions of this amount at specified times so you can pay your builder throughout the construction process. These loan withdrawals are known as progress draws and are a predetermined percentage of the total mortgage amount.
The lender will typically set a timeframe for the construction of your house and typically only require you to make interest payments while your home is being built. Once construction is complete and the builder has been paid, you'll start making full principal and interest repayments.
Before you can qualify for a construction loan, you'll need to have full plans drawn up and the project professionally priced by your contractor. Some lenders may impose a slightly higher interest rate during the building process, so it's important to compare construction loans and interest rates to find the right loan for your requirements.