If you are looking to save money while getting a new house for you and your family to live in, you may be wondering if it’s better to buy a house that’s already built or renovate an older home.
Like with most things in life, there are pros and cons to both options that should be considered before making a decision.
Should You Build Your Home?
The main reason to build your home from scratch is to have 100% creative control over the design and layout of your home. You can customise every little detail to suit your specific needs and tastes.
Pros Of Building A House
1. New Home Warranty: When you build a home, almost everything is brand new and under warranty. The construction materials and furnishings for the house are covered under the builder’s warranty – usually for six years but it could be less for some builders. You don’t have to worry about major repairs or replacements for many years.
2. Energy Efficiency: New homes are much more energy efficient than older houses. This is because they are built with the latest insulation, windows and doors. This will lead to lower energy bills and a smaller carbon footprint.
3. Government Grants: Applying for a construction loan, you can also apply for a government grant. The FHOG (First Home Owner Grant) is a great way to receive some extra money to help with the costs of building a new home.
Below is a list of other currently available federal government grants:
- Help to Buy Scheme
- The First Home Guarantee (previously the First Home Loan Deposit Scheme)
- The Family Home Guarantee
- The Regional First Home Buyer Support Scheme
- The First Home Super Saver Scheme
4. Instant Added Value: Most times, as soon as you finish constructing a house, its value goes up by almost 15% of the total cost. So, if you spend $600,000 to build a house, as soon as you get the keys, it could be valued at $690,000. Home loan-wise, this means you have already increased your equity in the property by $90,000.
5. Less Competition: It is easier to find vacant land than it is to find an existing home to renovate and live in. If you do find an existing home, there will usually be several other buyers looking at it as well. With vacant lands, there is often much less competition.
Cons of Building A House
1. Location: It is difficult to find vacant land near city centres. Most of it is on the outskirts of cities or rural areas, which is not favourable if you need to be near amenities.
2. Long Waits: Land registration and construction of a new home can take many months, sometimes up to a year. And even if you plan ahead, delays can happen, which will push back your moving date. If you need to move quickly, you may have better options.
3. Difficulty In Cost Control: One of the main drawbacks of building your own home is the builder/materials cost risk. This means that the prices for these items can go up mid-construction, and you may have to put in more money than you originally budgeted.
4. Difficulty In Quality Control: The end product may not meet your desired quality or may not even be close to what you pictured. You might also need to use lower-quality materials or make other sacrifices to finish construction on schedule.
Knockdown Rebuild Vs Building From Scratch
In a knockdown rebuild, the existing building is demolished and a new one is built in the same spot. This differs from building from scratch, where a new structure is constructed on an empty lot.
Before knocking down an existing house to build a new one, it’s essential to be aware of the pitfalls. One of the most significant risks is that your loan-to-value ratio (LVR) will increase sharply once the house is demolished.
For example, let’s say you purchase a house for $1.2 million, with the land valued at $1 million and the house worth $200,000. If you borrow 80% LVR on the purchase price, your loan size will be $960,000.
However, once the house is demolished, your loan will still be for $960,000, but it will now be against land valued at only $1 million – an LVR of 96%. And if that’s not enough, it also costs money to clear the land before you can start building.
In contrast, when lenders assess your loan for a new build, they will use the cost of construction (assuming it’s a residential property) plus the value of the land. In our example above, that would be $1 million for the land plus the construction cost, say $600,000. This gives a total value of $1.6 million. Even if your new property is ultimately worth more than this, the lender will use only the $1.6 million figure when assessing your loan. So it’s important to consider all possibilities when planning your build.
Should You Renovate Your Home?
The main reason to renovate is to add value to your property and make it more comfortable and stylish. You can make your customisations without heavily altering the existing structure.
Pros Of Renovating A House
1. Less Costly: Renovating your home can be cheaper than building one. When you renovate, you can work with the existing structure and foundations, cutting costs. The same is invalid with building from scratch or a knockdown rebuild.
2. Bigger Land Size: Older houses are often built on a larger block of land. So, renovating an older home is an excellent option if you’re looking for more space.
3. More Character: Older homes have more character and charm than new ones. Renovating an older home can help bring out its unique features and add to its overall appeal.
4. Better Location: An advantage of older homes is that they’re usually located in better areas. If you renovate, you can take advantage of a great location that might otherwise be too expensive to buy into.
5. Time Efficient: Building a new home from scratch can take years. If you renovate, you can move into your home much faster.
6. Can Hire Tradies: If you’re looking to save on costs, you may be able to use tradies instead of an official builder, depending on the work. You can do some of the renovations on your own as well.
Cons Of Renovating A House
1. Increased Costs: While it can be cheaper to renovate than build, there are still costs associated with renovating. These costs can quickly add up and end up being more than anticipated.
2. Messy and Stressful: Renovating can be disorderly and disruptive. There will be dust, dirt, and debris everywhere. If you have young children or pets, it may be best to wait until they’re older before starting any major renovations. There will be noise, mess, and disruptions to your daily routine which can be stressful. If you need more preparation for this, it can be quite overwhelming.
3. Expectation vs Reality: When you renovate, your vision may not match your reality as the existing structure limits you. Unforeseen problems may arise, or you may need help to achieve the look you’re going for. If you want complete control over the design of your home, building from scratch may be a better option.
4. Decreased Home Value: Not all renovations add value to your home. Some may even reduce the value. So, it’s important to research and speak to an expert before starting any major renovations.
Is It Cheaper To Build Or Renovate Your House?
While cost is a significant factor, there are other things you should consider when deciding whether to build or renovate your home. The most important thing is to think about what would work best for your lifestyle and then decide.
If you have a big budget and want to live in a good area, buying an old house and knocking it down to build a new one is a good option. This way, you’ll get what you want in layout and design. But this option is not recommended for first-time home buyers, as they will need a considerable deposit. Usually, people who proceed with a home loan for a knockdown rebuild have a net worth of not less than $1 million.
Building From Scratch
Building from scratch is probably your best option if you’re looking for a new house in an area with lots of new construction. This way, you’ll get what you want in terms of layout and design, and you’ll also be able to take advantage of government grants available for new homes and first-home buyers. Getting a construction loan to buy a block of land and build your house on it is a good option, as you’ll get a lower interest rate and have more control over the construction process. This option is popular among people who have migrated to Australia in recent years and care less about living in a prime location as long as they get their dream home.
If you want to shift to a house as soon as possible and then make changes to it over time, a renovation might work for you. This is a popular option for traditional Australian families. They will try to buy in an area not too far from where they grew up and renovate when they can afford it. You can easily apply for a renovation loan with any lender if you have a good credit history. A significant drawback of renovating your house instead of building it is that you won’t be eligible to receive a few government grants, including the First Home Owner Grant. Another thing to remember is that getting approval for major renovations from your local council can be challenging.
Note: You can also read ourpage on building vs buying a house to make a final decision.
The Next Step
If you’ve decided to build or buy your home, our mortgage brokers can help you find the right mortgage to finance your dream. Call us on 1300 889 743 or complete our free online assessment form.