Queenslander Houses Finance Hub
Home Loans & Renovation Series
Part One - Renovating, extending and new builds (basics).
Looking from a finance point of view.
(Note this is general information, not advice, as it does not take into account your individual circumstances).
There are several categories that are important when you need to borrow for your project:
Minor works – ‘cosmetic renovations’ – that generally don’t require council approval / certifier sign-off, are not ‘structural’ in nature, and the cost of works is usually under $100k (different banks will have different rules for cost limits and what is defined as cosmetic renovation). These works may still include swimming pools, and adding carports and decks (subject to bank criteria).
Major works – structural in nature, requiring council approval / certification, significant cost (e.g. $100,000+), require a ‘building contract’, project controlled by a builder, project manager or architect.
Owner-builder – if completing works yourself, or project-managing yourself, most banks are reluctant to (or simply will not) finance such projects. Note that many ‘relocation home’ projects will get caught-up in this category, and the banks will usually not even take mortgage over them until the house is deemed ‘liveable’ (think functioning kitchen & bathroom, fully lock-up/weather-tight and utilities functioning).
Construction Finance – required when completing major works – the key differences being: the completed value of the project can be used when looking at mortgage security value for your loan (generally a good thing – as the future/higher value is used, not the current pre-improvement value), plus the bank will control the money, releasing funds to the builder in agreed stages as the project progresses.
Minor works finance – loan increase/top-up or new loan account – where the bank is happy for you to borrow some funds, secured against the current value of the home, and control the use of those funds yourself, this can be quick and convenient so you can get on with those minor projects.
Note – all of the above topics will be covered in more detail in further articles to follow.
Part Two - Borrowing for Minor/Cosmetic Renovations
When you’re doing some work around the house that’s not really ‘construction’, these are often referred to as ‘minor’ or ‘cosmetic’ works. That’s not to say they’re cheap of course! Hence the common requirement to borrow money, adding to home loan borrowings.
What are Minor works? – these are often referred to as ‘cosmetic renovations’ – that generally don’t require council approval / certifier sign-off, are not ‘structural’ in nature, and the cost of works is usually under $100k (different banks will have different rules for cost limits and what is defined as minor/cosmetic renovation).
The most common minor/cosmetic renovations include kitchen and bathroom refurbishment/replacement, upgrades to flooring, re-roofing, floor-coverings, painting, doors, windows & window-coverings, stairs, plumbing & electrical upgrades, and minor reconfigurations of the current internal floor-plan (but not adding floor space).
These works may still include some substantial and/or ‘structural’ changes, which may include swimming pools, substantial landscaping, and adding carports and decks (subject to bank definitions & credit criteria).
Minor works finance:
A loan increase/top-up – increasing the amount borrowed on an existing loan – most banks will allow this (subject to normal credit approval), however some banks don’t have the system capability and require a refinance of the loan (therefore you may as well look at any bank to do it and look for the best deal).
A new loan account – a new home loan alongside your existing home loan account/s, or with a new mortgage (if your home had no existing mortgage & loan against it, of if refinancing across from another bank).
In both cases, the idea is the bank is happy for you to borrow some funds, secured against the current value of the home, and control the use of those funds yourself, this can be quick and convenient so you can get on with those minor projects.
The above points are critical, because if the project is more substantial, either in cost, or is classified as ‘construction’ (whether by contract or owner-builder/managed), or both, the bank will then not wish to just advance the money under your control, and then you will need construction finance (to be covered in the next part of this series).
Minor/cosmetic renovations example:
Melissa & Jacob wish to make some home improvements to give their dated home a good make-over, including a new kitchen, a new bathroom, repainting the interior of the house, and adding a deck at the rear.
They’ve got quotes for the four different parts to their project, and the cost has come in at $100,000.
Their home is currently worth $750,000, and their current home loan is $490,000.
When they borrow an extra $100,000 to pay for the renovations, their total loan amount borrowed against the home will then be $590,000. That figure is still less than 80% of the value of the property, and the loan is deemed affordable for the couple, so the bank is happy, and there will be no mortgage insurance required on the loan. (The loan will normally need to be mortgage-insured if your borrowings exceed 80% of the value of the property).
The purpose of the new borrowings has also been explained to the bank, therefore the bank advances the money and is happy for the customers to control the use of that money.
Note – these articles are general information only, and not advice. For credit assistance, contact me for a confidential chat, and we can explore options tailored to your individual circumstances.
Part Three – Borrowing for major renovations & construction
Major works – what are they? Generally ‘structural’ in nature, requiring council approval / certification, significant cost (e.g. $100,000+), usually require a ‘building contract’, and the project is controlled by a licensed builder, project manager or architect.
So these works might be anything from renovations & small additions to an existing house, right through to a full new-home construction.
Given that major changes are being made to the mortgage security property, a lender wants to make sure it’s being done right, the works are approved (where necessary), and the works are finished (which is the danger of most owner-builder projects – i.e. insufficient funds / underestimating the work/cost involved).
Owner-builder – if completing works yourself, or project-managing yourself, most banks are reluctant to (or simply will not) finance such projects. Note that many ‘relocation home’ projects will get caught-up in this category, and the banks will usually not even take mortgage over them until the house is deemed ‘liveable’ (think functioning kitchen & bathroom, fully lock-up/weather-tight and utilities functioning). More on these subjects in a future articles.
Construction Home Loan
This is required when completing major works – the key differences being:
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The completed value of the project can be used when looking at mortgage security value for your loan. This is generally a good thing – as the future/higher value is used, not the current pre-improvement value, which can remove the ‘restriction’ of just using the current value and perceived level of equity. The value of the completed project should, of course, be higher, and at least as much as the old value + the cost of the new works. If it’s higher, you’ve done really well, if it’s less (that current value + cost), then it may be a case of ‘over-capitalising’ (spending more on the property than is perhaps wise/justified for the location).
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The bank will control the money, releasing funds to the builder in agreed stages as the project progresses. They will also ensure the borrowed funds are used last (i.e. after any cash input from yourself), to ensure the project is completed (i.e. you don’t run out of money). This ‘progressive funding’ is otherwise known as ‘progress payments’ and will be agreed at the contract stage. As an example, a full house build will normally have 5 or 6 progress payment stages, often starting with ‘slab stage’ (after the agreed deposit).
The loan itself is usually just a ‘normal’ home loan, with the key difference being this progressive funding as mentioned above. The (drawn) loan balance rises with each progressive drawing (of the approved loan funds), after the builder or project manager issues an invoice (a progressive payment claim) to be paid. You as customer then sign off on it, and present it to the bank (via your broker) for payment.
Most banks will have a construction loan on interest-only during that progressive (construction) draw-down period – this way the overall balance of the loan funds does not change, so there’s certainty of funds available to complete the build. You only pay interest on the funds drawn at any given time (not the overall approved balance/limit if it is yet to be drawn-down and put into use).
Building Contracts – should be ‘fixed price’ agreements, again so there is certainty over cost and funds available to complete the project. However if your project is large (and complex), you may have a ‘cost plus’ project, where things are worked-out along the way. Construction finance for a cost plus project usually comes with some more restrictions (and many banks will not agree to financing them), including having to have more cash/buffer for cost blow-outs, greater equity in the property overall, and the project would often be overseen by an architect or another project-managing professional. A Quantity Surveyor often oversees the budget Vs the progress.
Out of Contract Items – these are additional works that are being completed on the project but not within the main contract – these are generally finishing-off items – e.g. you might be organising the floor-coverings, the painting, or landscaping yourself. Banks will generally allow this, however they must be quoted up-front so the bank’s Valuer can assess the worth of the project as a fully completed project, and of course to ensure every item is covered in terms of available funds.
Variations to the Building Contract – although it is a ‘fixed’ contract, it is quite normal for certain changes to be made along the way (i.e. by you) with the most common items being upgrades to fit-out items. You and the builder will sign-off on a variation notice, and you will usually have to pay for that invoice in your own cash funds, as it has not been allowed-for in the loan funds. Naturally everything is accounted-for along the way, and if there are surplus funds within the loan, they can be put towards variations, and any left-over funds at the end of the project can just be paid to yourself, or remain as a redraw amount in the loan (if allowed within the loan product).
How does the process work in practice?
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You can work with a designer on a rough plan of what you wish to do, and/or consult with a builder to come up with an initial plan and idea of cost of the project.
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With a budget somewhat confirmed, I (as a mortgage broker), assess the proposal with you to see if appears viable to borrow the required funds from a bank – this includes looking at your equity, both now and upon completion of the project (what it theoretically should be worth), and of course also looking at whether or not the banks should otherwise approve the loan (based upon affordability and other criteria).
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Pre-approval is sought from a chosen bank to give more certainty, and give you some confidence to continue with the planning of your project, as you will then incur more professional fees to have designs finalised, plus other fees including surveying, soil testing, engineering and town planning fees.
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You then normally enter into a preliminary agreement with your builder, which will usually require an initial deposit (typically around $5,000) for them to draft a contract and finalise costings & specifications, plus documentation (plans) in conjunction with the designer & the building Certifier.
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With a final (signed) building contract, we then go back to the bank to request formal approval of the required loan amount, organise an ‘as-if-complete’ Valuation of the property (i.e. the Valuer will assess what it should be worth upon completion), and provide the approved plans to then bank.
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Your builder will require confirmation of the finance approval, and then the agreed deposit, in order to commence construction. You provide a copy of the deposit receipt to the bank to show it’s been paid (if paid from your own cash funds).
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The loan funds will be used to fund the equivalent final amounts required to complete the project. (e.g. if it is a $500,000 project, and you are borrowing $400,000, you would pay the first $100,000 of costs before the loan kicks-in to pay for the remainder). Each invoice from the builder must be sent (emailed these days) to the bank for processing.
Insurance – the builder will insure the building site (and your house as it progresses) during the construction period. Once the home is nearing completion, there will be a ‘hand-over’ date agreed with yourself, and you must have your own building insurance on the home from at least that (hand-over) day onwards. The bank will normally require a copy of your insurance certificate also (plus will confirm the builder’s insurances prior to commencement).
After construction – your loan should now be fully ‘drawn’ and the repayments would normally revert to ‘principal and interest’ repayments (where you are paying both the interest plus reducing the balance of the loan over time). Your bank should do that automatically, however some banks require you to request the change be made. You may also then look at fixed rate options for the loan account should you wish to (as most banks will not allow the loan to be fixed during the construction / progressive drawings phase).
Note – these articles are general information only, and not advice. For credit assistance, contact me for a confidential chat, and we can explore options tailored to your individual circumstances.
Part Four – Owner-builders and incomplete construction.
Owner-builder – if completing works yourself, or project-managing yourself, most banks are reluctant to (or simply will not) finance such projects. Lenders see this type of lending as high-risk due to the probability of cost (and time) blow-outs, changes, and incomplete projects that are common-place with owner-builders. We've all seen 'that guy' that's been working on his owner-build (and/or boat) for 20 years!
Note that many ‘relocation home’ projects will get caught-up in this category, and the banks will usually not even take mortgage over them until the house is deemed ‘liveable’ (think functioning kitchen & bathroom, fully lock-up/weather-tight and utilities functioning).
Also note that 'project managing' your build can also see you categorised as an owner-builder, and again, will not be looked at favourably unless you are at least a builder yourself, an architect, or a qualified professional project manager.
Even builders who are just trying to build their own home, have trouble obtaining finance for their project.
Plus, 'taking control' of too much of the project (usually of course to save costs), from the main contractor, can also get you offside with your lender. They will usually allow a fair bit of leeway (e.g. you organising the floor coverings and the painting), but these items will need to be fully costed/quoted, again to ensure everything is provisioned-for and the house fully completed.
As mentioned in previous articles, banks prefer to see an independent builder, with a fixed-price contract, and the bank to control the funds (after the customer's funds are used) to progressively fund the completion of the build.
So is it impossible to finance an owner-build? No, just difficult and/or expensive (at the time).
There are several ways people go about their project financing, and the more equity/deposit/cash you have, the better (and more options).
Land (by itself) is generally not hard to finance, so that's the easy part.
Some people get clever at the land-buying stage and conserve their cash by borrowing as much as possible on the land, to then use their cash on the building project.
Interim finance options may include:
- borrowing funds from family or business
- using consumer finance (think personal loans, credit cards, line of credit)
- borrowing against other property
- using a specialist lender (often at high interest rate and/or fees) to finance the construction
With the idea being that once the house is complete, you then refinance to a mainstream home loan product on 'normal' conditions at competitive interest rates.
Lenders that will finance the construction will normally want to see substantial equity and/or cash resources (i.e. you have 20%+ 'skin in the game', and often more). They will also charge high interest rates, and may have high fees as well.
Like mainstream construction finance, the lender will also insist on certainty with the costs, therefore a Quantity Surveyor will be required (and more than once) to check and oversee the costs, plus the lender will usually want multiple valuations / valuer inspections along the way. This way there are independent professionals ensuring the project stays on track.
What is the main concern of lenders when it comes to owner-builders? Incomplete projects!
Incomplete properties
Lenders also don't like incomplete properties in general. Many will not lend on them at all, and others very conservatively.
Often an incomplete property will only be valued at land value, not a 'partially completed value', as it is just seen as too uncertain (as to what will happen with the property and how much it will cost to complete), and they will give no guarantee of any further finance on the property to complete the works.
Again, this is where a specialist finance option may be required, and again, it is preferable to have high levels of equity and/or cash.
As also mentioned before, removal houses can get caught up here, as most lenders need to confirm the house is not only already on site, but also liveable (think functioning kitchen & bathroom, fully lock-up/weather-tight and utilities connected and functioning).
Often in rural areas people start by building a shed, which of course also contains some basic living quarters as an interim measure, and that shed is only valued as a shed, even if it has morphed into more of a house-like structure (but not approved as a dwelling). So when getting it valued, it's only being valued as land, with some 'improvements'.
As you can see, there are many catches with finance and property valuations if being classed as an owner-builder, and each case is different.
Note – these articles are general information only, and not advice. For credit assistance, contact me for a confidential chat, and we can explore options tailored to your individual circumstances. - Shaun.
