Q&A: Home loans for builders or renovators

Contrary to what many people believe, there are plenty of finance options available to fund renovations, extensions and rebuilding projects. We had a Q&A session with Jessica Darnbrough, spokeswoman for mortgage broker Mortgage Choice, to tackle some common questions that builders and renovators have:

Q. How common is mortgage refinancing in Australia with the specific aim of funding alterations or rebuilding?

A. Home loan refinancing is very common in Australia. According to recent statistics from Mortgage Choice, in November 2014 construction loans accounted for almost 7 per cent of all loans written. Construction loans have, on average, consistently accounted for anywhere between 5 and ten per cent of Mortgage Choice’s business.

Q. What options are available to fund renovations on a property?

A. There are a few different ways renovators can fund the planned renovations:

• Home equity: Borrowers can access some of the equity they have built up through certain means like a home equity loan to fund their renovations. It is important to note, however, that the amount of equity a borrower can access depends on how much the lender will let them borrow. A borrower will need to prove they can service any increase in debt, so just because they have $200,000 in equity, doesn’t mean they will be allowed to borrow all of this to fund their renovations.
• Refinancing: By refinancing their mortgage, a borrower should be able to borrow more money which can then help fund their renovations. And, with interest rates low and Australia’s lenders proving they are hungry for business at the moment, refinancing may be an ideal solution.
• Construction or building loan: A construction or building loan works in a similar way to a home equity loan except that the lender will not release the full loan amount to the borrower upfront, rather…in stages as the renovation progresses.
• Line of credit: This is a slightly more complex type of funding as it lets borrowers access funds as they need it in order to pay for tradies or materials. Borrowers are charged interest on the balance owing on their account rather than a total loan amount.
• Personal loan: If the renovations are quite minor, borrowers may find that a personal loan is best. Importantly, the interest rates on personal loans are higher (as a general rule of thumb) than home loans as they are unsecured.
• Credit cards: A borrower can always opt to use their credit card to pay for renovation materials as needed. If their credit card has an interest free period, they can reduce the interest payable by paying the full closing balance each month by the due date.

Q. How can property owners finance a knock-down rebuild project?

A. The most common way a borrower can finance a knock down/rebuild project is with a construction loan.

To work out how much they can borrow, the property is generally valued as the land value less the cost of knocking down the old house. Borrowers can then normally borrow up to 90 per cent of the land value alone or 95 per cent of the total cost of the land plus construction costs if they have a licensed builder.

Q. Is it just the major banks willing to lend to rebuilding projects?

A. No, generally speaking most lenders will offer construction loans and thus lend to borrowers who are wishing to finance a rebuild project.

A borrower’s eligibility for a construction loan is evaluated in much the same way as it is for a standard home loan. In order to obtain finance, they will need to show proof of income as well as evidence of genuine savings.

In addition, if they plan to completely rebuild, they may need to provide their chosen lender with a copy of their property plans who will hand them over to a valuer who can then establish how much the completed property would be worth, thus determining how much a borrower may be able to borrow.

Rather than be restricted in their access to funding, renovators and builders are spoilt for choice with various options available. Be sure to fully cost all of the available options to determine which loan is best for you.