Loan Structure

Discussion in 'Loans & Mortgage Brokers' started by Paul D, 27th Aug, 2019.

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  1. Paul D

    Paul D Well-Known Member

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    Hi all,

    Hypothetical example below:

    - Construction cost for house (PPOR) estimated to be $600,000
    - Maximum Borrowing capacity $500,000
    - Savings of $125,000

    Will the lender factor in your ability to make up the difference between your max. borrowing capacity and the total construction cost with your savings?

    If so, how is the construction loan structured?
     
  2. Brady

    Brady Well-Known Member

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    Think you're overthinking this all.
    If you max loan is $500k that's your max loan, only option is to make up difference with savings.
    Your loan would be $500k...
     
  3. Paul D

    Paul D Well-Known Member

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    I understand that, but with a construction loan, you are afforded protected against the builder going bankrupt (for example) by the bank only staging the release of money.

    How would you incorporate the same protection with the savings being used to make up the difference?
     
  4. Brady

    Brady Well-Known Member

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    Your funds are used 1st, not the banks.
    Your funds are paid at each progress payment, which should be on competition of each stage (except deposit)
    Ideally you're only paying for work completed.
     
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  5. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    Part of the process is the builder will get builders warranty insurance. This covers you against all sorts of things going wrong with the builder.

    The first few progress payments will be paid from your funds. The bank will only start their payments once your contribution has been fully paid.
     
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  6. Paul D

    Paul D Well-Known Member

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    Thank you. Is this common, or do most people obtain the full construction amount from the bank?
     
  7. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    Common practice is if you've putting money into the construction, you need to put all your money in before the bank does anything at all.
     
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  8. Paul D

    Paul D Well-Known Member

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    In reality, how does this work? Wouldn't you need a loan approval for the bank for the remainder out, so you know your covered from the outset for the full construction amount with the builder?
     
  9. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    The loan approval is for the full amount, but it's drawn in the stages defined in the construction contract. There's usually 5 - 9 stages (progress payments) for a full construction, the builder will send you an invoice for each stage.

    You'll pay the first few invoices from the builder, up to the limit of your contribution. Make sure the builder gives you receipts. When it comes time for the bank to start paying, they'll want these receipts to demonstrate that you've paid your contribution.

    From the time the bank starts paying, you simply forward the invoice (plus some minimal paperwork) to the bank, then the bank pays the builder directly for the remaining invoices as they come in.

    During the construction period, the loan will be interest only. You'll only make payments on the amount owing at any given time, not the full amount that is approved.
     
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  10. Paul D

    Paul D Well-Known Member

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    Perfect. Thank you.
     
  11. Paul D

    Paul D Well-Known Member

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    @Peter_Tersteeg based on your experience as a broker in the current market, what sort of borrowing capacity would someone on a before-tax annual income of $70,000 have? Assume they are living at home with their parents at the time of the loan application...
     
  12. Brady

    Brady Well-Known Member

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    @Paul D he's not going to be able to give you accurate figures just from that.
    By the sounds you don't have anyone helping your with your finance, or if you do you don't have the confidence in them.
    Why not contact @Peter_Tersteeg and get him to help you with your finance.
     
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  13. Paul D

    Paul D Well-Known Member

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    The former, rather than the latter. Will do.

    Cheers
     
  14. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    For PPOR or IP? What sort of deposit is available, how is the income structured, would you get any rent an how much? The question is far too opened ended for any sort of realistic answer that you could rely on.

    In the most generous of circumstances that I can possibly think of, the borrowing capacity might roughly be:
    PPOR: $450k - $500k
    IP: $550k - $600k

    Don't rely on that estimate in any way. Almost nobody has circumstances that simplistic.
     
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  15. Marty McDonald

    Marty McDonald Mortgage broker Business Member

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    6 times income. Rough
     
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