Financing a building under construction requires careful planning and the right loan to ensure smooth cash flow throughout the development process. Unlike traditional home loans, construction loans provide progressive disbursement of funds to cover the different stages of building. In Singapore, banks and financial institutions offer various financing solutions to help property developers, businesses and individuals manage the costs of constructing a new building, including plh model options for tailored financing structures.
Understanding a Building Under Construction Loan
A building under construction loan, often referred to as a construction loan, is a type of financing that provides funds in phases rather than a lump sum. The bank releases payments at different stages of the construction process, ensuring that funds are used efficiently while mitigating risks for both the borrower and the lender.
Types of Construction Loans in Singapore
Progress Payment Loan
This is the most common type of loan for financing a building under construction. It follows a progressive payment structure, where the bank disburses funds based on the completion of key milestones such as foundation work, structural framework, roofing, and interior finishes.
Bridging Loan
For individuals who are building a new home while waiting for the sale proceeds from an existing property, a bridging loan provides short-term financing to cover construction costs.
Commercial Property Construction Loan
Developers and businesses constructing commercial buildings, offices, or mixed-use properties can access construction loans tailored for large-scale projects. These loans often require detailed project planning and feasibility studies.
Land and Construction Loan
For those purchasing land and financing the construction in a single package, some banks offer land and construction loans that cover both aspects under one financial arrangement.
Eligibility Criteria for a Building Under Construction Loan
To qualify for a construction loan, applicants must meet certain requirements set by lenders:
Ownership of the Land: Borrowers must have legal ownership of the land on which the building will be constructed.
Approved Building Plans: Lenders require approved architectural and structural plans from relevant authorities.
Financial Standing: Applicants must demonstrate financial stability, including a good credit score and sufficient income to service the loan.
Licensed Contractors: The construction must be carried out by licensed and reputable contractors to ensure quality and compliance with regulations.
Loan Repayment Structure
Unlike standard mortgages, construction loans typically follow a progressive repayment model. During the construction phase, borrowers may only be required to pay interest on the amount disbursed. Once the building is completed, the loan may either be converted into a traditional home loan or require full repayment, depending on the loan terms.
Key Considerations Before Applying for a Construction Loan
Interest Rates and Loan Tenure
Construction loans generally have higher interest rates than standard mortgages due to the increased risks involved. Comparing rates from different banks can help borrowers secure the best deal.
Loan-to-Value (LTV) Ratio
Most lenders finance up to 75% of the total construction cost, requiring borrowers to provide a minimum of 25% in cash or CPF savings.
Cash Flow Planning
Since loan disbursements are progressive, careful budgeting is essential to ensure that funds are available for each construction phase.
Approval Process and Documentation
The approval process for a construction loan is more complex than a regular home loan, as lenders require detailed documentation, including project feasibility studies, contractor agreements and cost breakdowns.
Top Banks Offering Construction Loans in Singapore
Several banks in Singapore provide construction loans for residential and commercial projects. Some of the top options include:
DBS Bank – Offers progressive payment loans for property construction with flexible interest rate options.
OCBC Bank – Provides financing for landed property construction with competitive interest rates and structured disbursement plans.
UOB Bank – Offers land and construction loans for home builders and developers, allowing financing for both land purchase and construction.
Conclusion
Financing a building under construction requires careful financial planning and the right loan structure. Whether for personal property, commercial development or investment, selecting the right construction loan ensures that funds are available at each stage of the project. By comparing loan options, interest rates and eligibility requirements, borrowers can secure the best financing solution for their construction needs.