This is step 2 in a 10 step process uncovering whether Owner Building is right for you.
Every journey begins with a single step, and now that you’ve moved on from realising how possible it really is to be an owner builder it’s time to start thinking about financing.
Overcoming obstacles in the owner build financing process comes down to following one simple rule: Never give up! Tens of thousands of Australians owner build every year and you can, too. Patience and persistence pays off. At the time of writing the banks are reasonably tight with their money so you must get your story right. And the worst case scenario is you may have to shop around before you nail a lender. Just like dating, don’t sweat a little rejection along the way, it’s part of the game!
It’s unfair discrimination. Don’t whinge, find a workaround.
Unless you happen to be a licensed contractor, your local bank won’t be interested in working with you as an owner builder. Now that we’ve got that out of the way, let’s look at what you need to do to get approved for a loan.
Lenders don’t want to assume the risk that an owner builder’s lack of experience leads to setbacks which result in a semi-finished structure. A half-built home isn’t very strong collateral. Banks require assurance that you will be successful, so arm yourself with ammunition to prove their investment is in good hands.
Detailed timelines and estimates for your project are a convincing way to show that your home will be built on time and on budget. Lenders view some applicants more favourably than others, it never hurts to make yourself look like a sure bet.
Buckle down and scrounge together a down payment, just like it’s the 1950s.
For most lenders, significant equity in your property will suffice, but generally you need to be able to prove that you have the cash available to pay for 20% of the construction cost on your own.
In reality, most traditional banks cap owner build loans at 60% of finished value. Unless you’ve got quite the nest egg saved up, you’ll need to look for alternative lenders. The good news is that there are plenty of mortgage brokers out there that specialise in supporting owner builders.
You’ve got a computer. Use it.
Google “owner build financing Australia” and you’ll find a number of brokers that deal exclusively with people just like you. Give several different companies a ring and find out what they offer.
Be sure to ask each broker for a previous client’s contact details to get in touch with them for a reference.
The anatomy of a construction loan.
Your lender will be able to draw out in detail the specifics of your particular loan, but here’s the basic lowdown on how construction loans are structured.
During the build you are typically responsible to make monthly interest payments on the portion of the loan that you have actually spent. Generally construction is divided into 5 parts: base, frame, lock-up, fixing, and practical completion. As you complete each phase, more money will be released into your account.
Once your home is complete and ready to live in, the loan automatically converts to a standard mortgage.
Of course, not every owner builder is looking to build a new home from scratch, in our next post we’ll talk about owner build renovations and expansions.