August 15, 2022
There’s so much to consider when deciding whether to build a home on your land, or simply purchase a ready made home. Things get more complicated again when you decide, like I did, on a KnockDown/Rebuild (KDR). Early on in the journey you will need to consider how you are financing your new home.
If you’re purchasing an existing home the decision should be quite simple – just go to your favorite financial institution and take out a regular home loan. Assuming you’ve done your homework, pre-approval should be straight forward. As should the loan itself.
Financing a build on your land or a KDR will not be so straight forward to most, at least it wasn’t for a newbie, like me.
Though it’s possible to obtain regular funding in the form of a home loan, or equity loan, most people building a home will utilize a construction loan. To understand why I’ll briefly outline how the building process works
A little about the building process
So, you’ve signed on the dotted line with your preferred builder. Color appointments, electrical appointments, and tender appointments are all just a fading memory.
Once your contract is signed and your final deposit paid, your file is transferred to construction, the build will progress in these broad steps:
1 Base – This is the preliminary earthworks and the laying of the concrete slab (does anybody build on stumps anymore?)
2 Frame – This is where the timber frame, including the roof trusses are assembled and the flooring is laid
3 Lock up – by this stage your house should begin to look a little more like a home. The external doors and windows are in place. Walls are in place and the roof is on. As the name implies, you home is secured.
4 Fit out – All internal walls, doors, cabinetry, etc should be in place.
5 Completion – At this stage everything must be complete and you should be issued a certificate of occupancy.
Why a construction loan?
Construction loans are different to standard home loans in that the financial institution allows you to draw down the loan in stages. These stages correspond with the various stages of construction outlined above.
One advantage of financing via a construction loan is that you only pay interest on the funds you have drawn down. So, if you’ve drawn down 10% of a $300K construction loan, you’ll only pay interest on $30K
** A 5% deposit is paid in the days after you sign your contract.
Base – 10%
Frame – 15%
Lock-up – 35%
Fit-out – 25%
Completion – 10%
Henley KDR not without risk
Obtaining a construction loan for a KDR or a build on your land is easier if you have plenty of equity in your existing property. I went through a mortgage broker who did all the work. It was easy.
Pre-approval was issued after I handed over a couple of employment pay slips and a list of my assets and liabilities. Full approval was granted only after I was able to present my financial institution with a copy of my contract.
There is a small element of risk involved for those undergoing a Henley KDR in that you need to have demolished your existing home to receive your contract. So, ipso facto there is a period of months where you have neither your old home, nor the financing in place to build a new one.
Not all building companies issue your contract after demolition of your existing homes. Boutique Homes, for example, issue your contract right after your tender appointment, well before you demolish your home. It’s worth keeping this in mind.