The first step to building is to find out how much you can afford to borrow and arranging for the necessary finance. If you’ve been through this before, you’ll know exactly how this works – if not, there’s a little more to it than just asking the bank for the precise cost of the house you’re looking to build.
So, we put your questions our trusted mortgage broker, Kris Faife, who has arranged finance for a number of Brownhill Home clients and staff.
Keep reading to hear what he had to say…
Brownhill Homes: What’s a construction loan?
KF: A construction loan is a type of lending facility that allows someone to borrow money for the construction of a new residential or investment property. It can also be used for major structural improvements to an existing home or investment property, provided there is a building contract prepared by a licensed builder.
One advantage of a construction loan is that the lender releases money at each stage of construction, which subsequently allows the borrower to avoid paying interest on funds not yet used. Construction loans can typically only be used for a single dwelling construction, however some lenders will allow for the construction of up to 4 dwellings on one title.
BH: What’s the biggest obstacle developers face when building units?
KF: The biggest obstacle for developers is unequivocally finding the right lender. We see many developers struggle to navigate the lending process, especially with the financial landscape changing as often as it has been.
Specifically for larger developments, it can be difficult presenting information to the prospective lender to get a positive outcome without the help of an experienced finance broker who is across the lender’s development appetite.
BH: If you were building a project of $500,000, when would you start making repayments on this loan?
KF: Most construction loans will require monthly interest-only repayments once construction has begun. However, the lender will only charge interest on what has been drawn down at each stage of construction – so repayments would typically start low and gradually increase until the project is complete, when you would be making repayments on the entire $500,000 used.
BH: The bank has said no, is this the end of the line or are there other ways I can obtain funding for a development?
KF: There is most often a finance solution available for any potential development. An experienced mortgage broker can compare multiple lenders and help locate a lender that potentially has more relaxed policies than the bank direct.
Of course, there are things to consider such as cost implications and higher interest rates so it’s always best to understand all the funding options available before deciding whether to proceed.
Have you got a question about financing a build? Our team can help – get in touch with Brownhill Homes today.