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Renovation Financing

Discussion in 'Property Finance' started by ExcuseMyFrench, 31st May, 2016.

  1. ExcuseMyFrench

    ExcuseMyFrench Active Member

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    Hi everyone,

    We are looking to buy our first property, PPOR. Very exciting and scary time ha!

    We have been conditionally approved to purchase a property of 850k. After reading many threads on the forum and posting my own, we have decided to focus our attention on an unrenovated house.

    My question is how does it work with finance for renovation? Do bank loan money based on future value?

    Let's say we buy an unrenovated house for 600k. Recents sales in the area show that renovated properties of the same size sold for ~900k.
    (Numbers are hypothetical)

    So loan on purchase would be IO 540k. We'd have to pay the 10% + duty, let's say 95k. That would leave us with 55k in the offset account. Not enough to renovate.

    Is there a type of loan that we could access then? Based on the 900k value of the house after renovation?
    Serviceability wouldn't be an issue.

    Thanks!
     
  2. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    Depending on the scope of the reno, and if you'd use a building contractor for the work you could buy it and get a construction loan for the reno. This depends on you not DIYing though.
     
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  3. ExcuseMyFrench

    ExcuseMyFrench Active Member

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    Thanks @Jess Peletier
    Would def not DIY, we're complete novice... We could do the last small cosmetic bits but that's about it.

    Outside of researching councils renovation rules etc is there anything we could about finance before purchasing?
    Ideally we'd do the renovations straight after purchase and moving in. Other option if liveable would be to rent while we get council approvals, plans and builders ready.
     
  4. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    The easiest way would be to settle on the property normally, then get all your reno work organised and apply for a construction loan. What kind of reno would you do? It would have to be fairly major structural building work, rather than just a new bathroom etc.
     
  5. ExcuseMyFrench

    ExcuseMyFrench Active Member

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    It would be to extend and add bedroom + bathroom + renovate existing kitchen/bathroom.

    It would obviously depend on the property but yes major structural reno.

    Is it a fairly easy loan to get in the current environment?
     
  6. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    For that sort of structural renovation you'd use a builder and have a fixed price building contract with them. The bank will value the property on the basis of the renovation being completed and lend (up to 90% in most cases) against that value. They essentilaly use the building contract and the plans as the basis for the valuation.

    Fairly straight foward from there, it's the same as any other construction loan.

    The biggest hurdle is often the valuation. If you start with a 90% lend, you may find that the completed value is tight and this might limit how much you can lend against the property.
     
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  7. ExcuseMyFrench

    ExcuseMyFrench Active Member

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    Thanks @Peter_Tersteeg and @Jess Peletier

    Sounds like I need to do my math carefully. The difficult to estimate variable in the equation is the fixed price building contract cost...
    How long is a piece of string and all that.

    Back to the drawing board!
     
  8. albanga

    albanga Well-Known Member

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    I would just ask further details to your comment "After reading many threads on the forum and posting my own, we have decided to focus our attention on an unrenovated house."

    Is this based upon renovations creating equity? If so that is true but this is mostly because people undertake a lot of these works themselves, or more so, manage the trades so they do not need to pay a builders margin.

    For what you are proposing being a significant investment and requiring a construction loan you may create very little if any equity. There is then the other issues that go along with renovating! Stress, living arrangements.etc. Try and put a value on these things because they can be significant and not worth the effort.
    Not saying you cannot but just be cautious of this.

    That said you may be wanting to renovate simply because it will be to your taste :)
     
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  9. ExcuseMyFrench

    ExcuseMyFrench Active Member

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    Thanks for your comment Albanga.
    No I'm not after creating equity but rather creating our dream PPOR. Buying an unrenovated/run down house and extending might be the only way to achieve our dream PPOR as we are priced out of 3 bedrooms houses in our preferred suburbs.
    I'm not even sure we could make the renovate/extend a 2 bedrooms house situation works for us financially.

    Any advice on someone we could contact to get help on whether this is achievable? I guess we'd need someone who knows the inner melbourne market well with finance expertise...
     
  10. albanga

    albanga Well-Known Member

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    What suburbs are you considering in Melbourne?
     
  11. ExcuseMyFrench

    ExcuseMyFrench Active Member

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    Preferably inner north up to Bell St. Ideal suburb would be Richmond though :oops:
     
  12. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    If you're priced out of 3 bedroom houses, I'm not sure that buying a 2 bedroom house and adding a bedroom shortly afterwards is going to be the answer. Purchasing then renovating on this scale usually costs more than buying the right house in the first place.

    In inner Melbourne the real value is in the land, not the building. The building is the cheaper part of the equation. Extending also tends to be a more costly excercise than building from scratch as you've got to work with the existing building. Extending 20% of the building space usually costs more than another 20% of the building value.

    Better to purchase something that meets the overall requirements. A cosmetic renovation is fine, but extending doesn't tend to be a cost effective strategy in the short term.

    Have you figured out your budget and have you consulted a broker to ensure you can borrow what you need? Then cross reference this budget with property values in the desired locations. Figure out what sort of house you can buy on that budget. In many cases that means compromises on either the house, or the location.
     
  13. Marty McDonald

    Marty McDonald Mortgage broker

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    1$ of fixed price building contract does not always equal $1 of valuation increase. So its hard to give advice on this. Depends on the proposed LVR too. If you are going for a 90% or 95% loan as a first home then this probably wont work.
     
  14. ExcuseMyFrench

    ExcuseMyFrench Active Member

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    Thanks Marty and Peter, I've taken your advices onboard and scratch the renovation/extension plan for now...