A construction loan is a type of loan that is used to finance the construction of a property. Construction loans are typically short-term loans, with maturities of one to three years. The loans are secured by the property that is being constructed, and the payments from the borrower are used to pay for the construction costs.
In the context of securitisation, construction loans can be pooled together and securitised to create a construction loan securitisation (CLS). CLS are a type of asset-backed security (ABS) that is backed by a pool of construction loans. CLS are typically issued by special purpose vehicles (SPVs), which are legal entities that are set up specifically to hold the underlying assets and issue the securities.
Here are some examples of construction loans:
- A bank might lend money to a developer to build a shopping mall.
- A financial institution might lend money to a contractor to build a house.
Construction loans can be a good source of financing for developers and contractors, but they also carry some risks. These risks include:
- Default risk: The borrower may default on the loan, which could lead to losses for investors.
- Construction risk: There is always the risk that the construction project will not be completed on time or on budget.
- Interest rate risk: The value of the securities may be affected by changes in interest rates.