The dream is there – you can already picture your beautiful new house on your favourite block of land. All you need to do is knock down that rickety old structure that’s sitting in its place to make room for the modern home you’ve always wanted.
But…can you afford it? And how do you go about getting finance for a knock down rebuild?
To find out, we chatted with friend and experienced Canberra finance broker Craig Butt. Craig has helped many people find the right loan to buy or build their new home, including those who want to take out a second mortgage to do a knock down rebuild.
Covering off the basics
Craig can visit you at home to chat about where you’re at and what you want to achieve. This means looking at your income, your expenses, your assets, and your credit history.
For a knock down rebuild, it also means figuring out how much equity you have in your home.
“The biggest mistake people often make is assuming that their house is worth ‘X’ because that’s what others in the area are getting when they sell,” says Craig.
“But, you need to keep in mind that your land and your house is worth ‘X’ – until you knock that house down. Then it’s worth ‘Y’, and you should take that into consideration when trying to ascertain how much equity you actually have in the property.”
Craig says there is no simple way to work out equity, so it’s best to have a chat with a professional who can run the numbers based on where you live, how much you owe on your current mortgage, the size of your land, and a number of other factors.
“Once we cover off the basics, we can decide which financial institution to approach for a loan. This could be your existing bank, if they offer a good rate and can do a construction loan. If your bank does not offer construction loans, we may need to move your mortgage to a bank that does.”
Getting a loan for a knock down rebuild
Before chatting to a builder about your plans, it’s a good idea to get loan pre-approval so you have some idea of budget.
Craig can help you complete application forms, and chat with banks on your behalf, to find out how much you can borrow.
“Once you know what you’re working with, you can chat with a knock down rebuild specialist such as Rosin Bros, and get an idea of what it’s going to cost to build the house design you envision.”
To be able to present a fixed price contract to your bank, you will need to get a builder to do a preliminary assessment. This means a site survey, plans and DA approval for the design of the home, inclusions (down to tiling and tapware), engineering certifications, and so on.
After this is complete, your builder will be able to lock in a price, which you can then give to the bank for loan approval.
“The bank will do a Tentative on Completion (TOC) valuation to determine if it fits in with their lending criteria. This is also a great way to ensure that you are not over-capitalising on your build. Their valuation is not the same as a real estate agent giving an estimate of what your property would be worth on the market. A bank’s estimation is based on square meterage, the value of your inclusions, and what the house should be physically worth when it’s built.”
If everything checks out, your loan will be approved and the best part – your knock down rebuild – can begin.
What a construction loan looks like
Your building contract will include staged payments, so you only make repayments once a certain part of your home is built. This usually includes slab stage, framework, bricks, lockup, and fixings.
You will owe the bank the least amount of money at the start of the build, and to make things a little easier for you during the construction phase, the repayments will be interest-only which keeps your repayments as low as possible. Once the build is complete, you will owe the entirety of the cost of the build.
In the case of a knock down rebuild, this means your new mortgage will be your current mortgage plus the cost of the build. So if your mortgage now is $200,000, and your fixed price building contract was $550,000, you will have a new mortgage of $750,000 – minus any deposit you pay to the bank towards the cost of the new home.
If this is feasible for you, then a knockdown rebuild may not need to be a pipe dream – but a very real possibility in the not too distant future.
To explore your options for a KDR loan you can call Craig on 0419 982 061 or visit Loan Market Canberra.
To chat with Robert or Danny Rosin about a knock down rebuild on your block, give them a call on 6247 4799 or email firstname.lastname@example.org.