Construction loan for investment property

I am given to understand that if I develop 2 townhouses on a land, it will not be treated as a commercial loan

My plan is to sell both the townhouses and if I don’t find a buyer, then keep one for myself and sell the second only

How does the construction loan repayment work ?

Is it also given for 30 years or for shorter periods ?
If I sell the townhouses, then obviously I will repay the loan immediately so will that entail penalties associated with premature loan payments ?


Cheers

 

Yep 2 units on a single title will be deemed residential by most lenders.

The construction loan is going to have various stages that the builder claims and thus the loan is progressively drawn down. You pay interest on the portion that is drawn down. Usually you will have around 7 or 8 stages.

However for simplicity sake lets use 3 stages; 40% Slab, 40% Frames and 20% Fitout.

When the builder claims for the 40% the bank will make this payment and you will pay interest on this amount, then the builder claims the Frame stage so that is a total of 80% that will be drawn and you will pay interest on. Then when he claims the Fitout you are paying interest on the total construction loan.

In the meantime you are still paying interest on the land portion as that it fully drawn.

Loan terms will be as per normal lending products so yes you can have a 30 year term. Note that most lenders will require you to commence construction within 12 months of the settlement date.

If the loan is variable then there are no penalties in repaying the loan early. You only pay the discharge fee. If you have gone through a broker and the broker charges clawback fees then this may be applicable.

 

I also have a question in regards to a construction loan. We are going to be building a duplex on our main residence and keeping both. In regards to our borrowing capacity and deposit required I’ve heard two scenarios. One is that the bank will lend 80% of the value of the land + the building contract price

The other scenario is lvr of the finished product.
Could someone please elaborate of how the banks deal with construction loans?

 

Lenders will generally take the lower of land plus construction or end valuation however depending on the strength of the application you can get them to rely on the higher amount.

 

Thanks Shahin, one more question for you mate. I’m a licensed builder and some people have suggested that the banks will make it difficult to get a construction loan when my building company will be building a duplex on our main residence. Do you know if there’s much truth to this? Perhaps they will just ask for a bigger deposit?

Thanks in advance

 

Yes that's correct however there are some lenders such as the dragon and Westpac that have a niche where they allow up to 80% LVR provided you have a fixed price building contract with a progress payment schedule. So effectively you will need to provide this to yourself (if that makes sense).

 

Yeah that makes sense mate. Basically a contract between my self and my trading company.

Thanks again Shahin

 

Hi Joseph,
I am a director of a building company that I have set up solely to build my own investment properties in my own name
We are using westpac to finance based on a standard hia building contract to myself at 80% lvr.
I have been told that this is the only lender that will finance an ‘owner builder’ who is the director of their own company.
Hope this helps

 

Hey mate. Thanks a lot for that Info. It does help.
Can I ask how Westpac asses you? So would you be paying a 20% deposit of the fixed contract price? Or does Westpac take into consideration the end product?

 

They get a valuer to assess the price of the building contract plus land contract and if it passes we just borrow 80% of that
I make sure that the build contract is full turn key and I can pretty much set whatever value I want within reason backed up by end values.
Haven’t done any knock down and subdivide yet but I imagine it should be the same procedure

 

So in a hypothetical situation. Let’s say our land value is $500,000 and our building contract is $700,000. The bank will lend 80% of $1,200,000 or is it 80% of your total lvr which would include the current debt on your house? So if we owed $300,000 on our current loan, I’m assuming the bank would allow us to borrow 80% of 1.2m less the $300,000 that we still owe?

Sorry to keep asking but it just didn’t seem right to just base it on the lvr of land value + contract because then you would basically be able to borrow more then your actual contract. 80% of 1.2m is $960,000 so the numbers just won’t stacking up.

 

Yes less current loan

 

Thanks Terry. Much appreciated mate.