In particular we focus on getting the loan structure right the first time, choosing which lenders to use in the right order (yes this is important) and finally getting our clients the best deal possible.
Case study: Small scale development finance (5 or less dwellings)
Marty McDonald
When it comes to finance for small scale development or unit blocks on one title most lenders will deem it a commercial transaction if there are more than 2 or 3 dwellings involved. This is regardless of whether the property will be subdivided, strata titled or whether they will remain on the same title.
Recently an investor came to me who had a block of land that had one property already built on it and had plans approved to build three more properties. This investor would be subdividing the land into separate titles in due course. Most lenders in this situation would want this to be assessed as a commercial transaction rather than a residential one. This has huge implications for fee’s, interest rate and the deposits / equity required i.e. the maximum LVR allowed as I will outline below.
Commercial development loans rates are on average at least 1.50-2.00% pa higher than standard residential rates. They also have significantly higher fees, typically from 0.50% - 1.00% of the loan amount. For a $1 million loan that’s a potential $10,000 fee. These loans also have a usual maximum LVR of 65% which can be limiting especially as valuations are often conservative.
Comparison: $1,000,000 construction loan over 12 months
|
|
Residential loan |
Commercial loan |
|
Interest rate |
4.20% |
6.50% |
|
Application fee |
$0 |
Minimum $5,000 |
|
Valuation fees |
$0 |
$3000 |
|
Quantity Surveyor / other fees |
$500 |
$3000 |
|
Minimum equity required |
20% |
35% |
|
Total costs over 1 year |
$28,220 |
$53,900 |
|
|
Saving=$25,680 |
|
With our advice and help in finding the right lender this borrower was able to get his loan on residential loan terms. He will save thousands of dollars.
About the Author: Marty McDonald is principal of mortgage broker “Mortgage
Experts”. Marty specialises in assisting active property investors with loan structuring advice and
implementation as well as helping credit worthy borrowers with slightly outside the box income and employment
situations. Find Marty on
Facebook and
LinkedIn.
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