Building or renovating is a great way to achieve the house you desire. You have the freedom to add quality craftsmanship and the design features that you and your family will value. Creative projects like these are both exciting AND stressful.
Many new home owners and upgraders are weighing up the benefits of purchasing a house and land package. Not only do you need the right loan features to move ahead financially and have greater control of your project, you also need the right advice on how the loan is to be considered by your lender.
There are generally two scenarios when applying for finance.
You have the option to purchase a parcel of land with agreed building plans. You enter into a single contract for the purchase that settles on completion of the house. We call this a house and land package. In this instance the builder is the owner of the land until settlement.
When the lender assesses this type of contract, the loan is calculated on the value at completion and is settled in a single transaction similar to a normal house purchase. Most lenders will require council stamped plans, a fixed-price building contract and a certificate of currency of the builder’s insurance policy.
You have the option to purchase a parcel of land and you may or may not have building plans available at that time. You enter into a contract for the purchase of the land and a separate construction contract for the building of the house. In this instance the vendor of the land may be different to the builder.
For this scenario, you will need two different types of funding: the first for the land purchase and the second as a construction loan for the building of the home. There will be separate settlements for each component. Firstly, you will be required to settle on the purchase of the land. In relation to the construction loan you will be required to draw down the loan in instalments to make progress payments as significant milestones in the construction are achieved.
Understanding progress payments
Typically, a build from start to finish encompasses anywhere from three to six stages. Before building or renovation begins, you will be required to pay a deposit to your builder for the construction (or renovation).
Then, after say the slab is poured, you draw down more money for that component while also paying interest on the previous draw down.
As the building work progresses, you will be required to make additional progress payments to the builder. With each instalment, you will be paying interest on the new portion of the loan plus interest on the previous payments until construction has been completed. These will be listed in the contract.
Your finance can be structured for these progress payments to be made on completion of these stages.
Please note: Building/construction loans aren’t generally available for renovations unless they are significantly structural and come with a fixed price build contract (for example adding another level or extension to your existing home). For a kitchen or bathroom renovation you would typically use your existing equity, line of credit or the money sitting in your offset account.
Budgeting for the associated costs of building a home
When it comes to choosing finance to build your new home or renovate, there are a number of associated costs to consider.
You will need to factor in stamp duty (on the mortgages AND on the transfer of the property or land), legal costs, insurance, surveys and searches, inspections, council rates and how progress payments are to be made. Other costs you may incur are rent and moving costs (if you have to rent while your new home is being built) and landscaping expenses after the building is complete if they were not included in your contract.
Your state stamp duty office can provide information on how much stamp duty you have to pay, how it is calculated and if you are entitled to a rebate, exemption or deferred payment. Better still, we are always happy to provide this information for you – simply call the office. We can also help you access your first home buyer rebate if this is your first home purchase. Remember these are different in every state.
Important note: Scenario 1 is a longer term project that is also off the plan, so it usually carries far more risk than scenario 2, hence banks will usually only approve finance for up to six months. If the project takes longer and there are negative changes to your financial position or policy/regulation changes in the meantime, you may not be able to settle the finance at completion. In this event, you could lose between 10 -30% or more of the project cost. Make sure you discuss this risk and its management with us together with your solicitor.
With so much to think about, it’s important to have the correct loan to suit your project. There are a range of options through a variety of lenders. Be sure to engage the professional services of a finance specialist like ourselves before entering into any contract with a builder. Our expertise could be the difference you need for a worry free building experience.