Owner-Builder Finance

Any general questions you might have in regards to loans and finance.
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essbee62
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Owner-Builder Finance

Post by essbee62 »

Hello, we would like some advice on Owner-builder finance. My husband is a builder and works in the building industry (for over 20 years).We would like to buy some land and have him build us a house. He is not registered but the building could be overseen by a registered builder or he could get registered if he had to and he is more than capable of building us a house. We are discovering that this may be difficult in terms of getting a loan. We don't have 20% up front of the land value we are looking at nor do we have 10% of the total cost of construction. Is there any way around this (such as having a guarantor) or will we just have to save up more money and in which case the land we like may be sold.

Looking forward to your reply.

Anne-Marie and STeve

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Otto Dargan
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Re: Owner-Builder Finance

Post by Otto Dargan »

Hi Anne-Marie,

You can certainly buy the land with a guarantor, and then you can hold onto the land ready to build on it at a later date. Our main lender for owner builders does not offer guarantee support for any construction loan that does not have a contract with a licensed builder.

The other lender for owner builder mortgages has not yet confirmed if they can consider this structure, they are a little slow so this may time some time. However they do require the guarantor to be in a strong financial position and to be working for normal guarantor loans.

You can certainly consider using a licensed builder to do the job and your husband can contract some of the work from the builder. This is complicated from a Home Warranty Insurance point of view, and there is a lot of extra paperwork. However from a lending point of view this is easy and we can lend you 100% of the total cost of the project.
Otto Dargan
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P | 1300 889 743
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Otto Dargan
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Re: Owner-Builder Finance

Post by Otto Dargan »

The other lender has replied that they cannot consider a guarantor. However We can get a lender to approve a loan on your parents property which they can lend to you as your deposit. When construction is complete you can refinance all or part of the loan so that it is predominately in your name.
Otto Dargan
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essbee62
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Joined: Tue May 10, 2011 10:27 pm

Re: Owner-Builder Finance

Post by essbee62 »

Ok, thank you Otto. We are thinking that the easiest option for us would be to get a work mate of Steve's to register the job/construction as he is a licensed builder and then he would contract Steve out to build it. He has said he would do this. So as you said then we wouldnt have to get owner/builder finance and come up with the extra money for the deposit, just a construction loan. Do you think that would be the best way to go?

Also after reading your post, I dont think my parents could be guarantors anway as they are retired but they own their own home and have money tied away in term deposits. They said they could take out a small loan against the house which we would pay to cover the deposit if need be. They have done that before for me when I bought a new used car. Is that kind of what you are talking about in the last post?

thanks so much for your help, we contacted another mortgage broker before you and she was quite negative about an owner builder loan which was really depressing, now I feel that we may just be able to do what we want to do. We need to get plans drawn up first dont we?, Steve also has to find out about when he could take time off from work to build the house too, probably next year so we would looking to get a loan around September time, hopefully if no one buys the land we like, should we give you a call then? Anne-Marie

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Otto Dargan
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Re: Owner-Builder Finance

Post by Otto Dargan »

If your friend will be the contract builder then make sure that he is aware that the bank will require the following:
  • Building Contract.
  • Specifications.
  • Council Approved Plans (You can provide this).
  • Construction certificate (NSW) or Building permit (VIC) or Decision notice (QLD).
  • Builders Insurance (Certificate of currency).
  • Builders Indemnity / Public Risk Insurance ($5 million minimum for most lenders).
He will need to invoice the bank and the bank will pay him as construction progresses. Any agreement between your husband and the builder for your husband to do all or part of the work is no longer a concern for the bank if your friend is the licensed builder.

You can buy the land now using a guarantor loan and then when you are ready to build you can increase the loan. We have done this several times before and as long as the loan is setup in the right way then there are no problems. There will be no need for your parents to take out a loan on their own if you have a contract builder.

I would recommend that you read more on our construction loan info page.

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Otto Dargan
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essbee62
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Re: Owner-Builder Finance/Construction loan

Post by essbee62 »

More questions this time about a construction loan. How does the payment side of things work. If we bought the land now, we would just be able to afford paying the mortgage for that and rent. But what happens with construction payments, do you start paying for the loan as each progress payment is made or do you start paying for the whole loan at the end? How does it work?

Also do you just pay a deposit on the land or do you have to pay a deposit on the construction side of things too.

cheers
Anne-Marie

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Otto Dargan
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Re: Owner-Builder Finance

Post by Otto Dargan »

Hi Anne-Marie

Yes the repayments & deposit can be a little confusing. The way it works is that you pay a deposit on the land and if you don't have a large amount of equity in the land then you will also need to pay a deposit at the construction stage as well. For example if you borrow 95% then you pay 5% of the land value as a deposit at land settlement & 5% of the construction cost as a deposit when construction commences.

With most banks you pay interest only during construction. You only pay based on the amount drawn down. So your payments are low at the land stage, and increase to the full size as construction progresses. Make sure you have spare funds to cover this time when you are paying both rent and the mortgage on the new home.
Otto Dargan
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essbee62
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Joined: Tue May 10, 2011 10:27 pm

Re: Owner-Builder Finance

Post by essbee62 »

What about if you had 10% deposit on the land, would you then have to put 10% deposit in for the construction or less?
We are looking at land worth around 210K and we would be able to put in 21K as a deposit, we have 46K in savings but we don't want to spend it all.
cheers

Anne-Marie

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Otto Dargan
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Re: Owner-Builder Finance

Post by Otto Dargan »

Yes that sounds ok. As long as that $21k is sufficient so that it is at least 5% of the total land and construction cost then you can put in a 10% deposit on the land and avoid putting in a deposit on the construction side of things (or a reduced deposit of only 1% to 2%). As long as the bank isn't lending more than 95% of the total cost of the project then that is fine if you are using a contract builder.

It is best to get the help of our mortgage brokers to structure the land loan & construction loan as there are a lot of complex factors that can impact the loan & it's cost to you. If everything is setup correctly at the start then this will remove a lot of the headaches.
Otto Dargan
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P | 1300 889 743
Home Loan Experts

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Otto Dargan
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Re: Owner-Builder Finance

Post by Otto Dargan »

Hi Fenso,

If a licensed builder is building their own home then we can sometimes get this assessed as a normal construction project not an owner builder project. In these cases we can help you to borrow up to 95% of the current value + costs up to a loan of $1m or up to 90% over $1m on a case by case basis. Ideally we'd prefer to keep the loan to less than 80% of the current value + costs as the cost of LMI would be quite expensive for a home loan over $1m.

Note that for a residential loan the lenders we work with would assess the current value not costs rather than the on completion value. You can only use the on completion value for a construction loan for larger development projects.
Otto Dargan
Mortgage Broker
P | 1300 889 743
Home Loan Experts

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