Renovations
How to finance a property in a bad condition
Many investors or more DIY inclined home buyers like to buy run down properties and restore them to their former glory. You can usually get a great price because the bad condition requires extensive repairs before the property can be liveable, which puts off many other buyers.
Financing these properties can be more difficult because the banks are concerned that if you half finish the renovations or if you don’t renovate at all then they would have trouble selling the property in the event that you didn’t repay the loan. So how can you finance your renovation project?
How much can you borrow?
No intention to renovate: You can usually borrow up to 80% of the property value depending on the location and condition of the property.
Minor renovations required: You can usually borrow up to 90% of the property value, depending on the nature of the renovations required. As a general rule cosmetic renovations are fine. If you are hiring a builder then you can borrow 95% of the cost of the property plus the cost of the renovations.
Major renovations required: You can usually borrow up to 80% of the value of the property unless you have a contract builder in which case you can borrow 95% of the cost of the property plus the cost of the renovations.
Knock down / rebuild: Normally the property would be valued as the land value less the cost of knocking down the old house. You can normally borrow up to 90% of the land value alone or 95% of the total cost of the land plus construction costs if you have a licensed builder.
No licensed builder: You can borrow up to 60% of the cost of the land and the renovations if you are doing it yourself.
Low doc: You can borrow up to 80% of the purchase price plus the cost of construction. Some more conservative lenders may limit your loan to 60% of the property value. Because lenders are very strict with this type of lending all low doc renovation loans are on a case by case basis.
Discounts: Competitive professional package and basic loan discounts are available.
Note: Most lenders restrict the amount you can borrow quite significantly if the property is in a bad condition. Renovation loans are assessed by different banks in very different ways so please contact us to find out how much you may be able to borrow.
A good rule of thumb
If the property could be leased in its current condition and has a working kitchen & bathroom then as a general rule normal lending rules apply. In these cases you can borrow up to 100% of the property value with a normal loan or 80% with a low doc loan.
Why are the banks so conservative?
Most banks have had all sorts of trouble with renovations going wrong, in particular when a licensed builder isn’t used. For this reason most lenders will decline your loan unless you use a licensed builder to repair or renovate your property.
