Building Your Own Home
So, you’ve made the decision to build your own home!
There’s probably nothing more satisfying than building your own home, because you get exactly what you want at the price you want to pay.
With our many years’ experience in the business, we’ve picked up some handy tips along the way that will help make the building process so much easier for you. We understand that dealing with councils and builders can, at times, be stressful and time-consuming; so the very last thing you need is for the loan process itself to be difficult.
What Type of Loan Do You Need?
The loan you’re looking for is called a Construction Loan. Basically, it’s a standard loan; however, the money is released in stages to the builder. These releases are known as Progress Draws. The Progress Draws will be based on the Schedule of Payments contained within the building contract.
While your house is still in the construction stage, the repayments on the loan will be ‘Interest Only’; then, once the house has been completed, the loan will usually revert to a standard ‘Principal and Interest’ repayment loan.
How Do I Obtain a Construction Loan?
To obtain a construction loan, the lender must assess your loan application based on the usual criteria, such as your general risk profile, your ability to repay the debt, and the Loan-to-Value ratio. Your lender will need to value the house on what it’s anticipated it will be like once completed, in order to gain an understanding of how much they are being asked to lend against the value of the property.
What Information Will the Lender Require?
To assist with the loan process, your lender will ask for the following information –
- Council approvals;
- Licensed Builder contract;
- Building specifications: meaning, what will the building be constructed of;
- Site plans;
- Site elevations; and
- Quotations for items not in the contract, meaning floor coverings, air conditioning, and so on.
The lender’s Property Valuer will use this information to determine the finished value of the house, meaning the house once it’s been completed.
It must be understood that, when determining the actual value of the house, the lender will generally use the lowest cost. By this we mean the lowest cost out of the ‘house and land’ cost and the ‘valuation’. So, there could be an issue if the house and land cost $500,000 to build, but the lender valued it at $450,000.
I’ve Already Purchased a Block of Land
What should you do if you’ve already purchased a block of land, but are having difficulty funding the house construction? Obviously, this is not a desirable situation, but with some careful planning a mortgage broker can help by reducing this risk. Depending on your circumstances, this might include signing a Land Purchase Contract subject to finance approval for the construction of the home. There are also other options, which we are more than happy to discuss with you.
We can help to ensure that the valuation comes in very close to the cost; so don’t stress – we’re here to help you work through the details.
It is important, though, that you do this prior to commencing the building process. A good resource for further answers and advice is available on realestate.com.au here and also don’t forget to talk about your options with a SMBIA broker by phone or email.