When purchasing a house and land package, financing is usually a little different than if you buy an established home. This doesn’t necessarily make it harder to achieve finance, it just means you need to be aware of the structure that will be required.
Firstly, it’s worth noting that the same checks and balances will be required as with a standard mortgage for an established home. That is, the bank or lender will want a valuation on the land and on the proposed home structure and they will assess their risk accordingly.
You are also still going to require a deposit and the borrowing power to obtain a mortgage, however if you are denied a loan and you are unsure, do make the effort to ask the lender why this has been the case. Sometimes it’s worth using a broker to find a lender who understands your situation. There are some 100%, or ‘no deposit’, home loans available for the construction part of the loan, however these will not be suitable for everyone.
Usually, a lender will provide you two steps to the process of obtaining a mortgage for a house and land package. You will buy the land with one loan and then build the house with another. The usual practice is to put them both together with the same lender, with both to be part of a bundle.
The land is usually bought with a straightforward mortgage loan that you will likely be more familiar with. The process is for settlement to occur on the land first, with a mortgage registered on the title.
The second part of the process is the construction loan, which will finance your build of the home. This is where an amount of funds is used in a ‘draw down’ staggered process over the loan. This offers some protection to the lender, but also means that you won’t pay the full amount of interest until the home is built.
Usually, you will sign off on invoices and costs provided by the builder of your home and the bank will then make these payments straight to them. It is also common that they will regularly inspect the work to ensure it is taking place as expected.
When the building is complete, there will be no payments left due from your lender and the full mortgage now applies. You will often be required to build on the land within one to two years to achieve the full financing arrangement. Ensure you speak to your broker and your solicitor about what is required to fully achieve your loan and what the timelines are within your contracts for building.
Point to consider: Deposit bonds
A deposit bond is a temporary substitute to having the funds upfront for a deposit. If your full deposit isn’t going to be available until the time when the build is set to begin, for instance you may have it caught up in other investments, then you may want to consider a deposit bond. This can assist you to buy into an earlier stage of a house and land estate even if your cash is not yet available on hand. Remember that it is not a replacement for a deposit, as you will eventually need to pay
Consider your finance prior to choosing your dream home in the estate so that you can select a block and an appropriate home that fits both your requirements and your budget. Do speak to the developer and builder, as they may be able to share different options with you that you hadn’t yet considered.
Obtain the following to provide to your lender:
- Quote or building contract (including for other works, such as gardens, pools or other structures, including that not being completely by your main builder)
- Drawdown schedule as per builder’s recommendations
- Builder’s details: licence, insurances
- Plans: Council approvals
In addition to the normal documents required for a no deposit home loan, you will also need:
- Building contract / quote: If you have chosen a builder then you will need either a formal quote or the final building contract so that the bank can assess the loan. The building contract should include the drawdown schedule requested by the builder.
- Builder’s licence / insurance details: Your builder must have the required licences and insurances for your state. Always check that your project is covered by Home Warranty Insurance (HWI) or the equivalent for your state.
- Council approved plans: Drawings of the proposed buildings that have been approved by the council will be required so that the bank’s valuer can assess the on-completion value of your property.
- Quotes for other work: Please provide quotes for any landscaping, sheds, pools or other work that will not be completed by the builder that is building the house.
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