Many people love the thought of building their own home. Constructing a brand new home that fits individual or family needs is an ideal situation for many clients. For many first home buyers, building their first home can be the only option they have so as to take advantage of the government’s First Home Owners Grant (FHOG) and stamp duty concession. There are also stamp duty concessions for non-first home buyers in some states.
Keypoint has been actively financing in the home building market. Our relationships with banks and various builders has enabled us to build our knowledge and expertise in this area of finance.
In contrast to buying an existing home, the home building process can be complex. There are many different forms of home building:
– Knock Down Rebuild involves the demolition of your existing home and the construction of a new one,
– Land and Construction involves the purchasing of land and then the building of a home. This is usually characterised by two separate contracts – one for the purchase of land and the other a building contract with the builder.
– Home and Land Package is when the land and home construction are under one contract. This is usually where the builder is selling the land and construction either as a brand new home or off-the-plan.
– Off-the-Plan is mainly used to describe the purchase of a unit or town house prior to completion of building. It can also relate to a home and land package yet to be built.
– Renovation relates to the modification and addition to your current home. For instance, adding an additional level to your current home.
Home building loans
Some lenders have specifically branded loans that are designed as building or construction loans, while others use their normal home loan products for construction purposes. In the past, construction loans were separated from normal home loans as they had higher rates and fees due to the extra cost associated with processing them. Most lenders today offer the same rates for construction loans as they do for normal loans but fees associated with construction are charged accordingly. The two main fees are drawing fees (also known as progress payment fees) and extra valuation fees.
One of the main questions regarding construction loans is whether payments start on a construction loan once it is approved. Construction loans are progressively drawn as each stage of your home construction is completed. There are usually five to eight stages in a home construction, depending on the builder, and after funding each stage this is added to your loan. If you are settling on your land purchase ahead of construction you will need to make repayments on this from settlement.
To obtain a detailed understanding of construction or building loans call us at Keypoint and discuss your options.
Managing cash flow commitments
One of the key issues concerning our home builder clients is knowing when and how much money is required at different times during their construction. Some of the common questions we receive include:
– When do I start paying repayments on the land loan and how much will that be?
– When is the First Home Owners Grant paid?
– When and how will the construction loan repayments be paid?
– Can we afford to make our loan repayments and pay our current rent at the same time?
Let Keypoint walk you through the process and help you understand your cash flow commitments. We have developed a process map that will help answer all your questions.
Planning for uncertainties
The length of time involved in construction can make it riskier than purchasing an existing home. Keypoint always advises clients to plan for contingencies by saving further funds or having alternate options to ensure they complete the building of their home. Also, be sure to do your home work when negotiating a building contract. The following are some risks you need to consider:
– Valuation Risk – construction lending involves the lender receiving an “as if” complete valuation from an independent valuer for the home you are building. It is important to ensure that all specifications and detailed plans are provided so that the valuer can make an informed valuation. Remember, the lender is providing you a loan against the valuation not the building contract price. If these are not the same and you still want to build that home you will need to come up with the difference.
– Market Risk – changes in market pricing can impact your valuation. In some cases, during the time of purchasing your land and obtaining your building contract, the real estate market conditions may become adverse, and this can have a negative impact on your valuation. Also, in respect to interest rate changes, increasing interest rates can have an impact on your servicing of the loan.
– Employment and Change of Circumstance Risk – at Keypoint we always advise clients not to make any changes to their financial position during the construction process, where possible, without understanding the impact on their ability to still obtain approval for their loan, e.g. considering a new car loan. Changing employment can also impact your loan approval.
Our experience with construction finance can help you understand any financial risks associated with building a home.