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 – Knock down rebuild
Marty McDonald
Have you ever wondered about how people borrow to fund a major renovation or even a complete knock down and rebuild?
We recently had some new clients come to us looking to knock down their current property and build their dream home. We decided to do this in a 2-stage process. First, we refinanced their current mortgage. Taking it from $290k to $370k. This increase was to cover the cost of demolition ($40k), to cover the rent during the 6-12 months they won’t be able to live in their house ($16K) and to provide a buffer for any unforeseen variations to the build contract once that part was underway (allowed $24K). The second stage was a stand alone construction loan of $570k.
The most common way a borrower can finance a knock down rebuild or major refurbishment project is with a construction loan tied to a fixed price building contract. A construction loan is where the bank approves a loan based on the completed end value of the home and advances “progress payments” based on the works completed and the schedule contained in the fixed price building contract.
A typical fixed price contract schedule would look like this:
|
Preparation |
Deposit to builder |
5% |
|
Base |
Concrete slab complete or footings and base brickwork complete. |
12% |
|
Frame |
House frame is complete. |
12% |
|
Lock-up |
Windows/Doors, Roofing, Brickwork, Insulation. |
24% |
|
Fixing |
Plaster, Kitchen cupboards, Appliances, Bathroom, toilet, laundry fittings/tiling Heating, Fixing/internal doors etc, Plumbing, Electrical, Painting. |
34% |
|
Completion |
Fencing, Site clean-up, Supervising builder |
13% |
What is needed
For a construction loan applicants need;
- Fixed Price Building Contract with an acceptable progress payment schedule.
- Building specifications or inclusions.
- DA approval and Plans endorsed by council.
- Quotes of any work not included in the main contract but may be needed for the valuation e.g. landscaping.
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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