Construction loan, also known as Alternation and Additional (A&A) loan is the loan that home owners took for doing a major renovation of his landed property.
For construction loan, the interest rate is much higher than housing loan. Upon TOP of your property, you can convert your construction loan to housing loan for the lower interest.
How is construction loan calculated?
80% (or 70%) x Property valuation – Outstanding loan – Total CPF used and interest = Construction loan available
Example:
Property valuation of a landed property = $2m
Outstanding housing loan of landed property = $1m
Total CPF used = $0
Construction loan available = $600k ($2m x 80% – $1m)
Some banks allow a future projection of valuation
Example:
Current property valuation of landed property = $2m
Future property valuation upon TOP of landed property after spending $1m on renovation = $2.8m
Outstanding housing loan of landed property = $1m
Total CPF used = $0
Construction loan available = $1.24m ($2.8m x 80% – $1m)