Are you looking to renovate or extend your home?
With today’s property prices, if you love the area you live in, it’s a great idea to renovate and create your dream home instead of searching for a new one. Not only will you get the home you want, you’ll avoid stamp duty and other fees associated with moving house.
- Access Home Equity
- Flexible Loan Solutions
- Construction Loans
Owner Builder or Fixed Price Building Contract?
If you’re reading this I’m going to assume you are looking to do a major renovation or extension not just a makeover of the bathroom or kitchen.
The first question you will need to answer is about how you are going to approach the build. Are you thinking about going it alone as an owner builder? Or are you happy to have someone else take on that mammoth task and enter into a fixed price building contract with a licensed contractor?
Your approach will have implications for the type of financing you will be looking for and which lender will be right for you. It’s important to note that not all lenders do construction loans and only a select few will lend to an owner builder.
Construction Loan features:
Stages of a Construction – A construction loan will pay your builder by progressively drawing-down funds as the build occurs – typically in five stages: slab down/base, frame stage, lock-up, fit-out and completion.
Fixed Construction Periods – Most lenders will allow between 6 – 24 months to complete the construction. There may also be a deadline for when construction needs to commence if you have purchased land to build on. Make sure you contact your lender if you need an extension on any of these deadlines.
Progress Fees – As the lender makes the progressive payments during your build there may be fees charged. Some lenders will charge a fee for each payment (up to $250), while others will charge a one off fee for all payments up front (up to $700). Check with your broker what these fees will be in your situation.
Contract Variations – If you’ve listened to anyone’s building stories, you will know that everything doesn’t always go according to plan! While it’s best to have any variations to your plans done prior to your home loan application, don’t panic if variations happen during the build. Just make sure you notify your lender of these changes as they occur during construction. Depending on the changes, they may need to complete another assessment.
Lenders have either tighter restrictions in place when lending to owner builders (for example the lender may approve a smaller amount of money to lend vs. someone who uses a licensed contractor), or will not lend to you at all if this is the case.
This is due to owner builder loans being classed as relatively high risk. Lenders are concerned that as an owner builder you will run out of either time or money to complete the project. The last thing a lender wants is you not completing the build and being in the position of having a half finished home they need to liquidate to recoup their money.
As an owner builder you will need to provide more documentation. This could include:
- Building and floor plans
- A total cost estimate of construction ratified by a quantity surveyor
- A copy of your owner builder insurance & permit
- A copy of the council approved plans
A few things you should keep in mind as you start to plan and construct your home.
- Keep to your budget. If you run out of money during construction the lender may not approve an increase for you. You will be required to include a contingency budget up front for any unforseen expenses.
- Don’t begin construction until you have your loan approved. If you have already commenced construction your lender may not approve your loan!
Fixed Price Building Contract:
It’s much easier to get a loan with a fixed building contract than as an owner builder. For a start there are more lenders to choose from.
This is because of two main reasons. Firstly, you have an expert on-board who will manage the build. This is less risky to the lender. And secondly, the fixed price component protects you (and the lender) from cost increases during the construction. A safer bet all around.
Documentation you may require for a construction loan with a licensed contractor.
- A copy of the fixed priced building contract
- A copy of the council approved plans
- Receipt for any deposit paid to the builder
- A copy of the builders licence, their public liability insurance and their bank account details for the progressive payments
- Quotes for any additional work not included in the fixed priced contract
- A copy of your Home Owners Warranty (HOW) insurance or BSA/QBCC Home Warranty Insurance (QLD)
As mentioned earlier, the loan type needed will depend on the cost and scale of the renovation you are wishing to embark on.
Here are the two main loan types used for renovations. If you want to chat to a broker to find the right loan option for you give us a call on 1300 135 456, use web chat or fill in our contact form and we’ll give you a call when it’s convenient to you.
Line of Credit Loan
This is typically the most common way for Australian’s to borrow money for a renovation. With this type of loan you are able to borrow the equity you have built up in your current property. Remember to calculate your equity based on an 80% LVR so you don’t need to pay Lenders Mortgage Insurance on the refinance. This loan gives you access to all the money upfront and you are able to use as needed throughout the renovation.
When using a construction loan for renovating, the lender will take into account the final value of the home when determining how much equity you have and how much you can borrow. The advantage of this is the ability to borrow more money than just the current equity you have in the home. This will assist if you are looking to do a major renovation. With this type of loan the lender will release the money to you in stages as the renovation progresses.
Ask a Broker
When renovating your home there are a few different requirements your lenders will be looking for. You’ll also no doubt be looking for a flexible home loan that allows you to access your money as and when you need it.
Let’s look at some questions you should be prepared to discuss with your broker.
- What type of loan is right to renovate?
- If I wanted to extend the house do I need a different type of loan?
- How do I access the equity in my current home?
- I own my home outright – does this affect the loan I need?
- Will a lender give me the money in one lump sum or will I need to be paid in instalments?
- How do I pay the builders?
- What happens if the build is delayed?
- How do the lenders value my property?
- Do I need to submit building plans?
- What insurances do the lenders need me to have?
- What is the maximum LVR I can borrow to?
- What loan features should I consider?
- Is a line of credit needed?
- Should I look at a redraw feature?
- Do I need to have the renovation completed in a set time period?
It’s good to be clear on what you want to renovate or extend and how much it will cost before applying for your renovation home loan. You want to make sure you have the budget and flexibility in your loan to do what you want to do. The flexibility required will depend on the type and scale of your renovation.
Here are some questions you should ask yourself before chatting to your broker so we can find the right loan for you.
- Are you using a licensed contractor or are you doing the project yourself?
- Are you remodelling a room or multiple rooms? Or are you looking to add on extra rooms or build up?
- Have you already engaged architects, builders and/or interior designers?
- Do you know how much your renovation will cost?
- Do your builders have the required permits and insurances?
- How much equity do you have in your home?
- Is there anything else you need to use your equity for?
- Will you need a line of credit?
- Do you want to stay with your current lender? Or are you happy to move?
- What do you think the value of your home will be after the renovation?
- What features do you want included with the loan?
Owner Builder – An owner builder is a homeowner who wants to build or extend a home on their land and this is not their day-to-day job. Instead of hiring a licensed contractor, they will manage the building schedule and take on all the responsibility and liability associated with the build. Requirements for owner builders differ by state so it’s a good idea to check these out before you start.
NSW | VIC | QLD | WA | NT | TAS
We look forward to discussing your home loan needs soon.
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