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Construction Loan - Progress Payments and Structure

Discussion in 'Property Finance' started by albanga, 13th Jan, 2016.

  1. albanga

    albanga Well-Known Member

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    Hey All,
    Going to be getting a construction loan soon and just wanted to get an idea of firstly what is the standard progress payment percentage and timeframe on say a 9 month build.

    Secondly how does it look from a structure viewpoint. Do you have 2 seperate loans. One for the land and then another for the build? Or just a single loan?
    And finally regardless of the a above structure, as each progress payment is made does the loan limit just increase. Or is it there from the start and is just drawn down as the bank releases it?

    Understand the second lot of questions is somewhat irrelevant but I just like to know what I will be looking at in advance.

    Cheers
     
  2. D.T.

    D.T. Adelaide Property Manager Business Member

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    For my recent one, it was one loan for the land and construction combined.

    The limit was the approved loan amount and didn't change or increase, just used it up each time a progress payment was spent.

    The monthly payments similarly increased as more of the loan was used.

    The quantity / frequency of the progress payments is specified in the build contract, not by the bank. My Perth builder did 5 whereas my Adelaide builder did 6.
     
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  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    No need for separate loans for land and build, but there may be advantages in splitting to segregate from a tax point of view in some instances.

    It will be one limit, but you won't have access to the funds until certain stages are met. The balance will increase as payments are made to the builder.
     
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  4. EN710

    EN710 Well-Known Member

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    Stupid question here - how does it work for say, 80% loan? When would you pay the 20%, and when would the bank start paying the rest?
     
  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Usually you would pay for the first progress payment and then the bank would start paying out.
     
  6. tobe

    tobe Well-Known Member

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    I do a lot of construction loans. I always recommend one loan rather than 2, or having both the land loan and build loan approved simultaneously. Just doing the land means more risk. Risk the building contract is more than expected (site costs being the major factor), risks the bank valuation will be short for the build contract (even after the land valuation was fine), risks your details change, or the lending environment changes between settling on the land and getting the build loan approved/settled.

    The vic schedule is 5 deposit 10 slab 15 frame 35 lock up 25 fixing 10 completion/handover.
    Many of the larger builders try it on with the alternate schedule which is loaded more to the front. Its better for their cash flow. Sometimes the valuers will make a note, and the assessor will ask them to change the schedule, but often it gets through.

    Yes, the loan limit increases as you pass on the builders invoice for each stage. This means the interest calculated daily changes, and the interest only repayment increases from month to month. I advise people to have the full interest only repayment in the direct debit account, cause its a difficult calculation month to month of what the payment will be, and the bank wont estimate it for you.

    Are you planning on using the FHOG for the build? Are you borrowing more than 80%?

    Construction loans are a whole policy niche for many lenders, and many bankers and brokers don't do many and get caught out. While the loan might be approved with one set of figures as your funds to complete, come land settlement the settlement team may calculate the funds required differently.
    For instance, some lenders can lend part of the build loan at land stage to account for any deposits previously paid the builder, or for the FHOG if eligible.
    Others will hold back the full build cost and other costs at land settlement leaving a shortfall.
    Others will calculate the funds required at land settlement on the LVR for the overall deal, minus costs, but ignore the build contract, and the building portion of the loan.
     
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  7. EN710

    EN710 Well-Known Member

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    So let's say total build + land 500K (50% land and 50% build) --> 400K loan + 100K deposit

    If the land settle first, does that mean you pay 50K and bank pay 200K?
    Or bank pay 250K for land, then you pay the 100K when the build happens?


    @albanga sorry hijacking your thread a bit

    No FHOG, 80% loan - only more if I can avoid LMI.

    0_o
     
  8. tobe

    tobe Well-Known Member

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    the land has to settle first, the builder wont start if you dont own the land. most lenders at80% will make you put in $50k plus costs at land settlement. then at build you will make the first $50k of payments to the builder before the bank loan takes over.
     
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  9. albanga

    albanga Well-Known Member

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    @tobe Thanks for your replies.
    I did just have a few more questions if you have the time.

    1 - What happens in the event of variations to a fixed price build contract. For example my quote is obviously not including "hitting rock". But what happens if they do and the 400k build blows out to 450k? Does the bank allow for this or is this your own out of pocket?

    2 - What do you do about financing things you want to do yourself? For example I plan on doing my own driveway, fences, blinds, landscaping.etc. I do have the cash for this but would prefer it to be part of finance (I like holding cash :)) but of course don't want it added into the contract with the builders margin? I asked the builder about having these added in as provisional sums that the bank would pay him and he would just on-pay but he said No. Reason being what happens after hand-over? Who is responsible for the cracked driveway.
     
  10. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    1. You will have to fund it yourself or apply for an increase in the loan.

    2. You might have to pay these yourself or if there is enough equity you can borrow.

    I have one at the moment where the client owns the land already and is borrowing about 120% of the building contract.
     
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  11. albanga

    albanga Well-Known Member

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    Thanks Terry
    And in your experience is it likely the bank will value at land+contract or end build. I have heard it is the lower of these but I know for sure my end build will be more because the land is being purchased under valuation.
     
  12. tobe

    tobe Well-Known Member

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    1. Provide the variations upfront and they get included in the valuation and funded. Get them later, in progress, like rock, and you're out of pocket.
    Note many builders will give you a fixed price contract that includes an allowance or insurance for rock removal. Note that rock removal costs money, but then new engineering has to be done on the fill that replaces the rock and the slab type can also change. Hitting rock can be very expensive.

    2 you can't finance stuff you do yourself. You can have the builder 'leave a space' in the contract by way of variation of allowance for other things, but for valuation the valuer will need an invoice or quote for these works. Its most common for driveways and landscaping, sometimes floor coverings and window treatments. Most builders won't let any work like this happen before they are off site/handover because of their insurance.
     
  13. tobe

    tobe Well-Known Member

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    Whose valuation is it under?
    New estate or established area?
     
    Last edited: 13th Jan, 2016
  14. albanga

    albanga Well-Known Member

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    So even if you added a "leave a space" variation, the valuer would not include it because they have no idea what it is?

    We just got the land subdivided and priced by various lenders, I plan to purchase the land under the price of all these vals but my current lender ANZ, valued it considerably high. It did raise an interesting point though, the valuations do not take into consideration connection of services, they "assume" all services are available. My site has no storm water and requires a retention system. They also did not take into consideration there is a 173 on title. Both these things would cause a price reduction if we went to market though. Hence why among a few other reasons, i would be buying under the banks value.
     
  15. tobe

    tobe Well-Known Member

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    Your going to buy the land from yourself?

    Interesting. I'm guessing for a long term rental hold? Or are you going to move in?
    Either way, why crystallise the taxes now?
     
  16. albanga

    albanga Well-Known Member

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    No I am buying my brothers half of the land. We purchased together, subdivided, sold the existing and now we have a vacant block of land that we own 50/50. I wish to purchase him from the land and then build my PPOR.
    So regarding taxes, I have another thread going on that. haha
     
  17. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    It will generally come in pretty close, unless you are over estimating. A recent one was $1.5mil end value for 3 in a row and it come in at $1.43mil for example.
     
  18. Zak

    Zak Well-Known Member

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    Currently i have an existing house that i brought not long ago. I have plans to knock down and rebuild. I also own a few IPs and my servicing is at its limit.

    Can i still borrow more money under a construction loan to build a new house?
     
  19. albanga

    albanga Well-Known Member

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    So in my situation, say ANZ valued the land at 400 and then I get a build contract for 420 then the end value will be 820k which is going to be comparable to what I am building.

    Say however I buy the land for 340 and build for 420 then which is likely going to be the value?

    Or even if I still use ANZ and they are the ones that valued it at 400k will they now say the land is valued at 340k because that is what I purchased it for?
     
  20. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Not if you cannot service.