Building or Renovating Your Home
You’ve decided you don’t want to ‘buy off the shelf’ and would like to make your home your own with a renovation or via a build. This can be a challenging process, as there is a lot more involved in your approval or potentially approvals to get you to your goal. However with good insight and planning it can be a very rewarding experience.
There are typically three areas ranging from renovation (minor works), renovations (major works) and a full build process with a block of land as a clean slate. Each scenario is treated differently between lenders and there are some important considerations in each instance. I will break up the three scenarios as follows.
Minor Works Renovations
This would for example be cosmetic renovations ranging from $20,000 repaint through to bathroom/kitchen renovations and external renovations such as a pool or landscaping. This is the simplest from a lending standpoint, and so long as you are not making structural changes or requiring council approvals, the lender will generally allow the approval and draw down (availability) of your renovation funds based on approving your financial position via assessment and ensuring there is sufficient equity in your property as it is now to allow for the loan increase. We can give you a good indication of where this may fit upfront prior to submitting any applications based on our internal review of your financial position and what your property may be worth. If there is any doubt to your equity, we can often arrange valuations prior to your application.
As with all home lending, it is also a great time to review any existing lending to make sure your rate and features are within your requirements. We can then make a good decision with you on where to place your loan and get you through to having the money ready to go.
Major Works Renovations
In a major works renovations, you are adding rooms or changing the layout of your property. You may be extending or raising the home to build under. Either way – you are requiring council approvals, engaging architects or drafting plans with a builder and looking at spending significant money on the improvements. In fact, you have likely spent significant funds just getting through that part of the process prior to looking for money to start work on the project.
Due to the property going through a state of major works and the need to ensure the project is completed to a standard, the bank follows a ‘construction’ process. This means you are seeking standardised and comprehensive building contracts from a licensed builder to take you from start to finish and handle all the subtrades and pricing in the one contract. While the bank is protecting themselves, they are in turn protecting you to make sure there is a very tight contract upfront to take you through to a finished product with as little stress as possible. They don’t want delays (or worse a stopped project) if you have not applied for sufficient funds to get you through to completion – this includes extras. Extras in a construction if you can’t pay for them without borrowing further are generally a no go zone. You must stick to the budget.
There are other considerations here as well, such as the timing of the process. Typically, borrowers spend months finalising and changing plans and selecting finishes and inclusions to end up at a finalised building contract, plans and specifications and only after this lengthy process can we truly begin to progress a loan application. The owner needs to be confident they are not overcapitalising on the property and should have a reasonable expectation of what it would be worth as a completed product. With this, we can gauge your equity position, however this can only be confirmed in the last stage of submitting finalised plans and the builder’s quote to a valuer for confirmation. Lenders have hard limits on what they can lend to as a percentage of the completed value, valuation shortfalls can be a very big problem with insufficient equity to complete or approve. You may wish to seek the advice and private valuation report of a registered valuer to ensure your vision of the property value completed would be in line with the market.
Assuming the lender is happy with the valuation figure and your financial position sufficient for an approval, they can then proceed to ready the builder for a start. It is important to note that this process will take approximately 4-6 weeks all going well from receiving your finalised contract, plans and specifications, submitting your application, to allowing the builder to start. It can take longer – be prepared for a bumpy road and delays if the contract is short on detail as it’ll halt everything until it is resolved. It is in your interests to make sure the contract, specifications and plans are comprehensive and include everything to get it through to the completed product.
As a start, you may gather that you will be in for many months of preliminary work prior to having sufficient to progress with an application. You can often expect another 6 weeks (approximately) for a start with the job, so patience is an important attribute to possess starting down this road.
You do need to be confident you are not overcapitalising as you will go through a long process only to find out what your completed project is worth to lend against in the final stages of submitting your application for finance. Do your research. What are similar properties selling for with the same completed features to gauge your ability to deliver the project and maintain the required equity buffer for your loan approval. You can enlist a private valuation with a certified valuer prior to finalising your decisions should property comparisons present difficult in your chosen area.
Complete Build Process – House on Vacant Land, House and Land Packages
Similar to a major works renovation above, there are considerable additional requirements to a ‘regular loan application’. Again, the lender is looking for fixed price building contract, plans and specifications prior to readiness to submit your application for the build. Again, maintaining equity and an acceptable valuation of the completed project is required prior to the loan being approved and commencement provided by the bank to the builder. This does again require a little patience while the lender conducts their checks and makes clarifications if necessary. A comprehensive building contract, plans and specifications are key to a smooth assessment and progressing through to a start date.
While each building project has some common requirements, each project is different. It pays to touch base early with us early to run through your projected timelines and how to get from planning stages through to moving in.
As with a major renovation, you do need to be confident you are not overcapitalising as you will go through a long process only to find out what your completed project is worth to lend against in the final stages of submitting your application for finance. Do your research. What are similar properties selling for with the same completed features to gauge your ability to deliver the project and maintain the required equity buffer for your loan approval. You can enlist a private valuation with a certified valuer prior to finalising your decisions should property comparisons present difficult in your chosen area.