Construction Loan - Progress Payments and Structure

You should emphasize this is a related party transaction otherwise the valuer will probably value the land at the purchase price.

 

i did 3 builds 1.5 years ago in VIC although it was not financed by the bank

1. you can get the builder to estimate the site costs etc and put a fixed price. make sure the contracts covers everthing like connection charges of services, it adds up and the consumption of electricty etc during the course of construction.

2. i would normally include the driveway and some basic landscaping., fences. But you have to realize that builders will cost more to do it. you might as well do these yourself. it cost less than 10K for a 330sqm land with a 170sqm house. Just remember if you have narrow lot to allow for dingo to get through at least 2.5 meters if the neighbours have their fences up.

The best thing abt the construction loans is that banks like NAB will get a qualified building inspector on every stage of the build slab, lockup, fixing etc so you can ensure they are not cutting corners.

 

Hi Guys, First post so please be nice.

With a construction loan will the banks lend to you if you have the 20% deposit or do you also need collateral against the construction part of the loan?

 

Yes they will lend against the land and against the construction component with just the land as security.

 

They will always require you to use your 20% cash deposit to pay the builder first, unless like terry said you have enough equity in the land to be able to borrow the full amount for the construction.

 

So understanding this, as long as you have the 20% to pay your builder banks will lend you the progress payments for construction... unless the land has enough equity to cover the construction loan?

 

Hi Tobe,

Will this apply to dual occupancy build? Will you be able to use the land equity to fund the construction loan?

How is dual occupancy loan structure different in comparison to subdivision?
Thanks!

 

Banks lend a proportion of their valuation, usually 80%. You need to pay the remainder first.

 

It's similar for dual occupancy. Loan structure can be the same as well, as usually dual occ is built together, with shared walls etc on one building contract with one owner one builder and one bank. To have two owners (not co owners) you would need to have seperate titles.

 

Tobe can I assume lenders will lend against single title dual occ based upon an end valuation minus a certain risk percentage?

For example separately titled a dual occ value is 500k each for 1mil combined end value.
If however not subdivided first they would value it at 1mil minus some risk percentage, say 20%?

Risk being loan defaults and they are stuck trying to offload a 2 home, single titled property.

 

Yep. The valuer will give a value based on current title. Two on one is less than seperate titles. It isn't a risk based percentage, it's just what the valuer can determine. If there aren't a lot of dual occ in the area they may give subdivided properties in their comparables and then apply a discount.

Builder will want to build before titles are split usually, which can be problematic if equity is tight.

 

We just put ours through Westpac. One loan for land and build. It was 90 percent a and we paid the ten percent on settlement of the land.

We did ours a bit differently. We wanted to make sure the house valued right before we settled on the land so we got the "fixed price" package valued on basic drawings with a reasonable spec. It valued fine so we settled on the land. We just went through selections and spent about 500 dollars more which we will pay. We are taking our chances with the footings but we think we will be ok. Apart from that we aren't expecting variations. Bank told us they will pay up to the loan limit and anything else comes out of our pocket. When we need to pay we just phone them and they pay. We are paying interest only on the land at the moment and will repay principal on completion. Hope this was useful.

 

From my last H+L, you'd pay the deposit all upfront. based on above example, 100K for land, 150K loan for rest of land and draw the loan down as building progress.

 

Opening an old thread with a new question around construction.

What would be the likely outcome if you owner built with own funds and got 80-90% complete and then ran out of funds.

How would a valuer assess this do you think? Would it be land plus a quantity surveyor report as to cost to date?
Or would they simply not touch it and you would need to fund it another way and then revalue with a lender on completion?

 

lenders don't like to lend for half complete properties. it would be difficult to finance. if you could find a lender then they would require a fixed price building contract to completion.

 

My preference is to get a single construction loan.

Why because then you are drawn down on the loan and it is active. If you have two loans and it take a while between settling the land and the build they may need to reassess the construction loans.

Also typically there are 5 payments...Base...Frame...Roof..Lock-up..and Final. Some banks will do another val on completion which can catch you out.

 

But how would they value this in terms of LVR and LMI? My understanding is valuations are lower of end value or land+fixed build contract.

Say for example the land is worth 500k and I borrow 80% for that. I then tip 300k of my own cash into the build. I need 100k to finish it off and get a fixed build contract.
The end value will be 1mil BUT the land+Contract value is only 600k. This would mean only 60k of equity to 80%.

To borrow the 100k required the LVR would be at 86% but technically in 2 months time it's 50%.

 

They would value based on the materials used, projected end value and the land value, same as valuing a construction loan upfront.

 

Based on what a bottom feeder would offer to buy a half completed property for, or based on the land value minus the costs to demolish.
If it were truly 90% complete, you would find the funds somewhere else, not worth it trying to find a home lender to take on an uncompleted owner builder home, and like terry said, if you could find a lender, they would need a fixed price contract to completion.