Construction and Renovation Loan Options to Make the Most of the HomeBuilder Package
With the recent announcement of the HomeBuilder package by the Australian Government, now may be the perfect time for eligible owner-occupiers to build a new home or complete an overdue renovation.
The Homebuilder package is a $25,000 grant provided by the government when you build a new house with a property value less than $750,000 or complete a renovation where the contract is between $150,000 and $750,000. The contract must be signed between 4 June 2020 and 31 December 2020 to receive the grant. Construction must also commence within three months of the contract date.
To receive the $25,000 HomeBuilder package, owner-occupiers must meet a set of eligibility criteria. Click here to view the full eligibility criteria as outlined by The Treasury.
If you meet the eligibility criteria for the HomeBuilder package but do not have the financial means to support your build or renovation, there are two potential options to borrow the funds to get you started.
Option 1: Construction Loans
Construction loans are available for when you choose to build a new property OR complete significant renovations to an existing property.
In addition to the normal supporting documents you need to provide, the majority of lenders who offer these loans will require a detailed list of information to show what you intend to build or renovate.
This information can include:
- Signed and dated building contract
- Progress payment schedule
- DA approved plans (council approval)
- Receipts for items already purchased not included in the building contract
- Quotes for additional items you intend to purchase not included in building contract
- Copy of the builders insurances
- Copy of their public liability insurance
Once you have been approved for a construction loan, you will then be in the hands of the lender for when the payments will be made to your builder (these are called progress payments).
Progress payments will only commence once you have used all your own funds. The payments will then be made at milestones throughout the construction process (i.e. deposit, base/slab, frame, lock up, fit out, completion).
At each stage, a surveyor from the lender will go out to the site and inspect the property to ensure each stage has been completed and is on track to finish.
The construction loan will be interest only repayments during the construction phrase or in some cases, the interest can be capitalised on to the loan. Once construction has finished, the loan will generally turn to principle and interest.
These particular loans can unfortunately be tedious as you have very little to no control over the funds.
Option 2: Cash Out for Renovations
Another option available to you is a cash out loan in the right scenario, if you have sufficient equity in your home.
In simple terms, a cash out loan means you could gain access to your equity without having to sell your property now.
An example of how this works is provided below:
- Value of property = $1,000,000
- What you can potentially borrow = $800,000 (80% of value, anything above incurs lenders mortgage insurance)
- Minus existing debt = $200,000
- Available equity = $600,000
Assuming you can service a total debt position of $800,000, and wanted to borrow funds to conduct some ‘minor’ renovations, some lenders will loan you the money to do so.
This means that you can gain full control over the funds without having to provide all the detail to the lender.
If you would like to discuss your available loan options further, please contact Allan Hall Finance who can walk you through the process and answer all your questions.