There’s more than one way to build a home
Buying land and later building on that land with a construction loan is a popular way to buy a new property.
On the other hand, turnkey properties, although a little more expensive, are becoming more common because they are much less complicated and allow you to move in right away.
What type of house and land package loan so you need?
What is a house and land package?
The first type of house and land package is where you buy the land and then build the house later.
However, you would normally do this if you don’t plan to build on the land for more than two years.
House and land package loans are bundled together as a deal but the general requirement is that you start your build within two years.
On other hand, a ‘turnkey’ package is a particular type of house and land package where developers buy the land, build the home and then sell them as a completely new house and land deal.
The turnkey property comes with everything you need to move straight in including:
$25,000 HomeBuilder Grant
The federal government has announced a $25,000 grant to either build a new home or renovate an existing home.
The grant is available for home buyers and home owners who sign a contract before the 31st of December 2020.
You can view the full eligibility criteria on our HomeBuilder page.
How much can you borrow?
Which house and land package loan do you need?
- Buying land first: You can generally borrow up to 95% of the value of the block of land.
- House and land package: You can borrow up to 95% of the value of the of the on completion value of the completed house and land package.
We suggest that you get pre-approval first.
That way, all you’ll need to provide is a few other documents to apply for your house and land package loan.
Discover if you qualify!
Call us on 1300 889 743 or complete our free assessment form today.
What documents do I need to provide?
The first part of the application will be to provide standard financial evidence to prove that you can afford to borrow the amount you need including:
- Your last 2 payslips.
- Three forms of ID such as a drivers licence, passport and Medicare card.
- A recent statement for any debts or credit cards you have.
- 3 months’ bank statements.
- Evidence of your deposit typically in the form of a 3-6 months’ history of savings in a bank account.
For the construction specifically, you’ll need to provide:
- A fixed building contract.
- Building plans.
- Building specifications.
- Contract of Sale for the land.
- Quotes for additional work.
If you’re buying a turnkey property, all of these costs are built into the contract just like a normal Contract of Sale.
To get a better idea of the documents required to apply for a house and land package loan, check out the construction loan documents page.
How does the loan work?
Buy the land and then build
With a typical house and package loan, the first component is the loan for the vacant land, which in itself is like a normal home loan.
The amount you can borrow depends on the size of the block but, with a typical-sized block, you can borrow up to 95% of the value of the land.
The second part of the loan is the construction loan component.
You will be approved for the construction component based on the lower of the bank’s “on-completion valuation” and the cost stipulated in the building contract.
Once approved, the construction loan is typically “drawn down” in five stages.
The bank will make progress payments to your builder at the end of each stage as you sign off on the invoices and costs the builder provides you.
The bank will also inspect the work on a regular basis to ensure that the build still matches the agreed building contract.
The method of making progress payments offers a level of protection to the bank but it also benefits you because you only make interest only payments until the build is finished.
Once construction is complete, your mortgage will kick in and you’ll start making principal and interest repayments.
Check out the construction loan tips page for more tips and guidance when building a home.
With a turnkey property, the complete cost of the land and build is set out in a standard sale and purchase agreement between you and the builder.
You will typically have to pay a 10% deposit at the point of signing the contract with the balance being payable at completion of the build process.
In order for the remaining funds to be released to the builder, the house must be fully completed and ready to move in with your state’s equivalent code compliance certificate.
If you only have a 5% deposit (and you qualify for a 95% turnkey loan), the bank will normally lend you the additional 5% deposit to make up the 10% deposit required for the builder.
The benefits and drawbacks of each type of build
Buy the land and then build
For many first home buyers that choose to buy a new home, they prefer to have a say in the final look of their home.
A typical “buy land now and build later” approach is also a cheaper option than a turnkey loan.
The reason is that while the property is being built, you pay interest only on the construction component.
In the meantime, before you start building and the builder draws down their first progress payment, you can get a head start on making repayments on your land loan and leverage the benefits of land equity.
You may even qualify for a stamp duty concession and even claim interest only payments on tax.
Please speak to your accountant about claiming tax benefits.
Turnkey builds tend to be a little more expensive.
However, the big benefit for many first home buyers is the fact that you only start making your mortgage repayments once the property is complete and your home loan is settled.
You won’t have to contend with making progress payments while trying to pay rent.
You can also claim a stamp duty concession.
Want to know more about a house and land package loan?
Speak with one of our mortgage broker about your situation by calling 1300 889 743 or by filling in our online enquiry form.
Do you have a deposit?
You generally need to have a 5-10% deposit to qualify for a house and land package loan.
Struggling to save a deposit?
Get in touch to find out if you qualify.
Beware of Lenders Mortgage Insurance (LMI)
When borrowing over 80% of the property value, you’ll be hit with a fee known as LMI, a mortgage insurance premium charged by the lender because of the risk of your home loan.
You’re not inherently a risky borrower. It’s simply because you’re borrowing at such a high Loan to Value Ratio (LVR) and this is what catches a lot of borrowers out.
If you borrow up to 95% for a turnkey property, for example, you’ll only be transferred 91% for the build because of the cost of mortgage insurance.
That’s not including the associated purchase costs like stamp duty and conveying fees.
The deposit that you’ll need for the house and land package will vary so it’s best to speak with a mortgage broker before you sign the building contract.
Won’t the first home buyers grant help?
The first home owners grant (FHOG) will help you in funding a turnkey project but not for the purchase of vacant land.
That’s because the state will only transfer you the grant when you make your first payment to the builder.
It’s important you have a discussion with your mortgage broker about your plans to build a property.
Those that are inexperienced may lodge your house and land package loan as one application.
Unfortunately, this causes significant issues later on because the bank will not be able to advance the loan for the land until the builder is ready to start.
This can cause the entire application to fall over and for you to have a stressful experience resubmitting your application at the last minute.
Alternatively, you may also qualify for the federal government’s first home buyer deposit scheme which began from 1 January 2020.
Do banks have preferred builders?
Your builder needs to be licenced and registered with your state’s relevant Master Builders Association.
Other than that, banks don’t have preferred builders.
However, they have been known to ban dodgy builders in the past so it’s important to do your due diligence and check that they’re licensed.
Below are developers that banks deal with on a regular basis:
- Metricon Homes
- BGC (Australia)
- Meriton Apartments
- ABN Group
- Brookfield Multiplex
- Simonds group
- Henley Properties
- MJH Group
- Burbank Homes
- GJ Gardner Homes
- Mirvac group
- Porter Davis Homes
- Carlisle Home Pty Ltd
- Hickinbotham Group of Companies
- JWH Group
- Pindan Pty Ltd
- Impact Homes Pty Ltd
- L.U. Simon Builders Pty Ltd
Do your due diligence
When choosing a builder or developer, find out what their experience is.
Ask them to provide contacts for their customers and ring them to find out their experience and whether they were happy with the final product.
Other questions to ask include:
- How long have they been building and how packaged homes have they sold?
- Do they have an acceptable level of builder’s warranty and insurance?
- Ask them what isn’t included in the fixed price contract!
What if I make changes to the building contract?
Try to avoid this if you can.
Changes that could blow out the building costs by even just $100 may require you to complete an entirely new house and land package loan application.
Do I get the First Home Owners Grant?
Yes, the First Home Owners Grant (FHOG) is available when purchasing a new house and land package.
If you’re building and not buying a turnkey property, the cost of the grant will be paid directly to the lender when the first drawdown is made to the builder.
Use the FHOG calculator to find out what you qualify for in your state.
- Don’t commit to buy land or build until you are pre-approved.
- Make sure your lender or mortgage broker is experienced with construction loans.
- Make sure that your land contract and building contract has a subject to finance clause or cooling off period just in case the lender’s valuation comes in low or they decline your loan for any other reason.
- Get legal advice from your solicitor before signing a Contract of Sale (land) or a building contract.
- Ask your mortgage broker to calculate your funds to complete (required deposit) for both the land purchase and the construction.
- Have a sufficient deposit because some lenders may require you to use all of your deposit to pay the initial invoices before releasing funds.
- Have funds on standy! Building costs can quickly blow out and a shortfall in the valuation means you’ll need to provide additional funds to cover the cost of the construction or land purchase.
- To minimise cost blow-outs and building delays, make up your mind on design, materials, finishes and fittings before you start building.
- Do you have friends who are in the building industry? Get them to guide you through the process of building.
- You’re trying to get the council, builder and a lender to work together so expect delays and problems!
Apply for a house and land package loan
Discover if you qualify for a house and land package or a turnkey loan.
Call us on 1300 889 743 or complete our free assessment form today.