Construction Finance
Table of Contents
1. Talk to Your Mortgage Broker!
2. Preparation
3. How Much can you Borrow?
4. How Much Deposit do I Require?
5. What are the Costs Involved in Buying a Property?
6. Can I Afford It?
7. Types of Home Loans
8. Buying the Land
9. Construction Loans
10. What are Drawdowns/Progress Payments?
11. How Do Construction Valuation Works?
12. What Additional Documents Do I Need?
13. Owner Builder
Talk to your Mortgage Broker !
Your Mortgage Broker is here to assist you navigate this complicated process so it is important to engage them early in the process.
01. Discuss your existing situation, your lending needs, requirements and obtain all necessary information pertaining to your lending application.
02. Explain the types of loans available to you from a range of banks and specialist lending institutions.
03. Based on the information provided by you and utilising specialist lending software, match your lending requirements to a selection of loan products offered by a diverse range of lenders.
04. Provide an overview of the relevant costs associated with your loan application.
05. Provide an in-depth overview of the loan product or products you select.
06. Act as an intermediary between you and the lender by completing and packaging your loan application.
07. Liaise with your solicitor, real estate agent, accountant and any other related party to ensure a smooth and timely settlement.
08. Assist with any future lending requirements, whether you wish to check, change or top-up your loan.
Preparation
THE KEY BEFORE GETTING YOUR KEYS
Before you start looking for a home or investment property, there are several key details to consider such as:
How much can I borrow?
How much deposit do I require?
What are the costs involved?
Can I afford it?
How Much Can You Borrow?
The amount you can borrow will depend on several factors and is another reason why it is important to engage your Mortgage Broker in the process BEFORE you are wanting to buy a house. Your borrowing capacity will depend on several factors including:
Your Income
This includes your fixed remuneration and any bonuses or allowances you receive. It is important when discussing your income with your Mortgage Broker that you disclose the types of income as some lenders may assess different types of income at different rates. As an example, your overtime might only be assessed at 80% of your income, but if you were in essential services it may be assessed at 100%.
Your Living Expenses
Mortgage Brokers and lenders have an obligation to ensure they are not putting you into a loan that would cause you undue hardship.
Key factor in assessing this is reviewing your living expenses. This is normally done by assessing your last 3-6 months transaction and credit card statements to assess how and where you spend your money.
One of the key benefits of working with your Mortgage Broker before you are ready to buya property is that they can help you identify any changes in your spending habits thatyou could make to provide a more favourable view to the lender.
Your Financial Liabilities
This includes things like credit cards, personal or car loans and Student HECS debt speak to your Mortgage Broker when they are assisting you with your loan to check whether the lender will need to factor in Student HECS Debt for servicing. It also includes limits and Balances of buy-now-pay-later services like After Pay and Zip Pay and any interest free loans you may have. Credit cards with no debt owing but still active also need to be disclosed
How Much Deposit do I Require
If this is for an addition or granny flat is equity available in your family home?
Most lenders will want to see evidence of consistent savings over a period of 3-6 months. This is to not only show that you have the funds to complete the transaction, but that you also have the discipline and commitment to pay your ongoing mortgage repayments once you settle your loan. However, there are some lenders that may make an exception, so be sure to discuss this with your mortgage broker so they can guide you. The amount of the deposit can be varied, so speak to your broker to let you know your options. If you borrow more than 80% of the value of the property, this will require you to pay Lenders Mortgage Insurance (LMI). LMI is a cost which you, the borrower, pay at the settlement of your loan that protects the bank in case you default on the loan and they must sell the property at a loss. It is important to understand that LMI does not protect you if you get sick or lose your job. To avoid paying LMI you generally need to borrow less than 80% of the value of the property. If you would like to learn more about the LMI difference click on the link to head to one of Australia’s leading providers of LMI to find out more: https://helia.com.au/. However, to find out if taking out Lenders Mortgage Insurance is in your best interest speak to your Mortgage Broker so they can run analysis on your situation.
What are the Costs Involved in Buying a Property?
Bank Fees This includes any application or valuation charges and can vary between lenders.
Stamp Duty This is a government cost that is usually the biggest expense outside the purchase price of the property. Stamp duty varies between the states and territory. Your Mortgage Broker can assist you in calculating this amount.
Lenders Mortgage Insurance This is a cost to you, the borrower, that is generally charged by the bank if you have less than a 20% deposit on the property. It can vary between lenders and your Mortgage Broker can assist you in calculating this amount.
Government Fees These include things such as mortgage registration, transfer fees and title searches.
Legal Costs Either a conveyancer or solicitor will review your Contract of Sale and ensure appropriate checks are conducted on the property with local government agencies.
Property Checks It is always recommended that prior to purchasing a property, you hire professionals to inspect the property for structural defects, concerns, pest infestations, anything that could potentially cause damage to your property.
Removalist Costs Will you do this yourself or hire a company?
Utilities Set up of utilities which may include a connection fee and up to 2 months of charges as they may charge in advance.
Can I Afford It?
Please note, whilst it is good to review your living expenses and reduce discretionary costs, it is also important that you balance that with your lifestyle. You want to ensure that this is a budget you can stick to long term and not feel like you are sacrificing too much for the sake of buying a house. It is important to therefore factor rate increases into your calculation.
Types of Home Loans
There are several different types of home loans and your Mortgage Broker will assist you in choosing the right one for your specific needs.
Fixed Rate Home Loan
A fixed rate simply means that the interest rate is guaranteed for a certain amount of time – commonly between 1 year to 5 years. The benefits of a fixed rate loan are that you know what your repayments will be over a specific time frame and you can budget accordingly. The interest rate is not going to go up (or down) over that period. The disadvantage however is that fixed rates loans are not very flexible. There will be a limit to the extra amount you can pay off over the fixed term and fixed rate loans rarely allow you to redraw any surplus funds or have an offset account. The other thing to be aware of is that if you have to sell the property during the fixed rate period, you may incur break costs which could run into the 1000’s of dollars
Interest Only Home Loan
An interest only loan is where the borrower only has to pay the interest accrued each month on the loan, rather than paying down the principle balance. Usually it is associated with investment properties in line with a strategy from the accountant or financial planner. The benefits are that the repayment is reduced, thus freeing up cash for other purposes however, the principle will still need to be repaid and once the interest only period is over you will be paying off the principle at higher repayments than you would if you started paying the principle off from the beginning.
Variable Rate Home Loan
A variable rate means that the interest rate will rise and fall with the market over the period of your home loan. This can be in line with movements in the official cash rate by the Reserve Bank or it may be a decision by your financial institution to vary their rates. The main advantage of a variable rate loan is flexibility. While you must meet your minimum monthly repayment, you can usually pay more if you want to. There is also no cost penalty if you decide to sell your property and move. You also generally can have access to an offset account, redraw or both. The main disadvantage of a variable rate loan is that your minimum repayment amount may rise or fall at any time in line with either the Reserve Bank or a business decision by your financial institution. This can make it hard to plan especially for those on a tight budget.
Buying the Land
Before you can build your house, you need some place to build it. Buying the land is the first step on the road to building your new home and there are a couple of different ways this can take place. DIY Land and Construction You may find a block of land that you like, make an offer on it, have it accepted and then need to go and find the builder of your choice to build on that block for you. This is a good option if you are looking for something highly customised or you are wanting to wait a bit before building. House and Land Package This is the process where you secure both the land and construction at the same time but through two separate contracts. Generally, there are a select number of builders and designs that are on offer in this scenario and you can choose from them and make minor amendments.
Tip: If you are buying the land and settling on it before you decide on a house to build, it is recommended to get a preapproval for the construction to ensure there are no surprises with the lender when it is time to build.
Construction Loans
The Construction Loan is a loan that is drawn down in stages as your property is being built.
This means that your monthly mortgage repayments slowly increase as the construction moves forward until finally at completion of construction the loan repayment reaches its full monthly repayment amount.
This process is helpful as you may still be paying rent or board at another location while your home is being built.
Most lenders also offer interest only repayments during the construction process which revert to principle and interest repayments once the construction is complete.
To qualify for a Construction Loan, you will need to have council approved plans and a fixed price building contract or a tender from a licensed builder.
This can be a challenge as you don’t want to sign the building contract until you have approval from the bank that you can borrow the money but they need a contract to assess your loan.
There are several solutions to this problem including negotiating a finance clause of at least 3 weeks into your contract or providing a draft contract.
Some banks will provide approval on a tender but the problem here is things often change between the tender and contract stage and you would then require the bank to reassess.
You should also note that you will need to use your saved funds or equity before drawing down on your Construction Loan.
Always check with your Mortgage Broker if you would like to make any variations to your building contract, prior to proceeding.
Upon completion of your property, the Construction Loan usually reverts to a standard variable rate home loan.
What are Drawdowns/Progress Payments?
In a construction loan your builder is usually paid in draw downs (sometimes also known as progress payments) which occurs when part of the work is completed. Builders will usually send you a progress invoice each time a progress payment is due. Your lender may also require you to sign a progress payment form that they will provide. You would need to send this form to the Lender along with the progress invoice. Once the progress payment is approved by the lender, the builder will be paid from your loan account.
Many Construction Loans have approximately five draw downs. These drawdowns are often at the following stages but may vary depending on your building contract:
1. This is generally paid after you have had your loan approved, before any building starts and the loan commences. This allows the builder to finalise the plans and any variations. The builder will then send the proposal to your local council for building approval.
2. Slab Complete This is the stage where the foundation is laid. It includes measuring out the design on the site, pouring the footings and foundations, under slab drainage, moisture barrier and termite protection.
3. Frame Complete This includes installation of internal and external support structures, including walls, conduits for electrical and plumbing, the roof frame, sheeting, gutters and insulation.
4. Lock Up Stage It is at this point that all windows, doors and remaining walls are completed and you can quite literally “lock up” the property.
5. Fit Out Stage All the internal work such as plumbing, electrical (including lights and power points) and other fixtures and fittings will be completed. This also includes things like cornices, tiling, cabinetry and shelves, all the features that make a house a home.
6. Practical Completion All painting and installations are complete and you are ready to move in.
How Do Construction Valuations Work?
Generally speaking the bank will instruct the valuer to review the value of the land, (either from the Contract of Sale or from their own valuation if you already own the property) and the cost of building the house from the construction contract and specifications. They will then assess it in comparison with the value of other similar houses in the area.
The result will either be the cost of the land plus the value of the improvements or the valuation amount in comparison to other properties in the area, whichever is the lowest.
What Additional Documents Do I Need?
In addition to your standard documents relating to income, expenses and other debts, you will also need to provide the following:
Building Contract This includes things such as the building stages, the drawdown schedule, how long construction should take and the final price.
Building Plans This is the specific drawing that outlines what it is you are building, they don’t need to be council approved at this point but are required to provide the valuer with an idea of what it is you are building.
Specifications This outlines the type of materials you are using including the quality of the finishings and appliances.
Quotes for Additional Works It is important to read your building contract carefully as sometimes there are things not included and you may have to get quotes for these additional works. Typical things not included could be:- SWIMMING POOL, SHED LANDSCAPING AND RETAINING, WALLS, DRIVEWAY- FENCING
What Do I Need to Provide After Approval?
Once your loan has been approved and you have provided the approval to your builder, they will start the process of finalising the plans and sending them to council for approval. Once this is completed, you will need to provide the following to the bank prior to them releasing funds for the construction:
-Signed Contract (fully signed by builder & purchaser)
-Signed Specifications (fully signed by builder & purchaser)
-Council Approved Plans
-Builders Risk Insurance
-Arrange insurance covering the full replacement value and ensure that your lender is listed as Mortgagee.
Owner Builder
You may decide that you have the skills and resources to either build your home yourself or manage the process, this is called an Owner Builder. Whilst there are the obvious advantages of saving money and building the house exactly to your specifications, there are some things you need to take into consideration before you proceed down this path.
Level of Experience Whilst you are not required to be a licensed builder to get an Owner Builder license, the majority of the lenders now will require you to have experience building a home before they would lend to you in an Owner Builder scenario.
Loan to Value Ratio The banks consider Owner Builder lending to be higher risk and as a result will lend a lower loan to value ratio, generally around 60-65%. This means you would need to have significantly more equity or cash in the project before they would consider you.
Cashflow Like a standard construction loan, the lender will only release the funds once the stage has been completed. They will generally send a valuer out to inspect the progress and if satisfied, release the funds to you. The challenge this can present is that you need to have the cashflow to pay for things before the bank reimburses you, so having funds to complete is imperative.
What services does Into Finance Lending Solutions offer?
Into Finance Lending Solutions specializes in expert mortgage broking, helping clients find suitable home loan options tailored to their needs, owner occupied, investment or commertial.
We can also assist you with vehicle and asset purchases.
How can I start the mortgage application process with Into Finance Lending Solutions?
Contact us on 0406 184 144, email to [email protected] , through our website or facebook to discuss your mortgage needs and start the application process.
What areas does Into Finance Lending Solutions serve?
We primarily serve Mid Coast and surrounding regions in New South Wales, and can assist clients all over Australia providing expert mortgage broking services to everyone.
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