If I've hit my borrowing wall, can I still borrow to build?

Discussion in 'Property Finance' started by jaybean, 2nd Jul, 2015.

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  1. jaybean

    jaybean Well-Known Member

    20th Jun, 2015
    Eg. Knocking down a house and putting up four villas or two semi-detached homes. If the projected rental income is expected to be significantly higher, could this be essentially considered a boost to serviceability?

    Reason why I ask is because when buying, they always ask for a rental apraisal from an agent, which is used in part to calculate whether you qualify for the loan. It seems to me this is essentially the same thing? For people who have hit their limits, this seems like it could be a way to squeeze out one final hurrah?
    Last edited: 2nd Jul, 2015
  2. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

    18th Jun, 2015
    Perth WA
    Have you definitely hit the wall? If so it's unlikely that the rental income will boost your servicing anywhere near enough to fund multiple builds - but it would be worth verifying with your broker that you have actually hit the wall.
  3. Redom

    Redom Finance Strategist Business Plus Member

    18th Jun, 2015
    Sydney (Australia Wide)
    For these type of loans usually the rental income can't be considered on the purchase of the land.

    If you go for a construction loan of two dwellings (plenty of lenders will do this) you can include the rental income from the dwellings. The finances are reasonably similar (progress payments, etc) to a H&L type loan, except the land is already yours.

    Not sure if this alone is enough to cover the assessed expense of the construction loan though, but it does assist as your rental income gain needs to cover the build component. Note if your knocking down your current residence and its rented, you'll need to exclude that from serviceability assessment.

    E.g. you got an old place renting for 500 p/w. You want to construct a duplex that'll rent for $1000 p/w and the construction cost is $500k. You've essentially added $500 p/w to your serviceability (well $400 as 80% of its used). This alone usually isn't enough to overcome a wall per-se, especially with assessment buffers rising.

    Last edited: 2nd Jul, 2015
  4. TaylorChang

    TaylorChang Well-Known Member

    2nd Jul, 2015
    For the construction, you can try to use asset lending.

    Normally, asset lending attracts higher interest rate and it's in the commercial lending field.
  5. Be Developer

    Be Developer Property Developer Business Member

    19th Jun, 2015

    Simple answer to your question is no.

    If you are maxed out for borrowing capacity, bank wouldnt want to lend money.

    As construction of 4 units will cost around min 500-600k + soft cost.

    Most lenders will go up to 3 for residential loan @80% and some lender will go up to 5 in resi.

    If you end up with up with commercial loan, it will be @65% lvr.

    Also, bank and you will have to consider lot of other variable:

    Serviceability of debt (especially peak debt)
    Professional fees
    Subdivision cost
    Other DA conditions
    End value as is
    Profit margin on deal.

    You can give it a shot at following

    Buy a house
    Rent it out
    Apply for DA
    Once DA is approved, refinance the land
    If you can do sufficient enquity release...some brokers here may be able to get deal across the line.

    Hope this helps!!
    Gypsyblood likes this.
  6. Marty McDonald

    Marty McDonald Mortgage broker Business Member

    22nd Jun, 2015
    Sydney North Shore and Norther beaches
    Most will only do 2, a few do 3 or 4 but 5 good luck in resi space.