All Topics / Finance / residential construction loan?

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  • Profile photo of shanemattshanematt
    Member
    @shanematt
    Join Date: 2008
    Post Count: 70

    I have an IP that one day we will knock down and rebuild.IT will be our PPOR. Will a bank lend on the future value of a new house and its increased value?

    Profile photo of BankerBanker
    Participant
    @banker
    Join Date: 2010
    Post Count: 371

    After the property is built yes. The bank can value the property and you can lend against the new value.

    If you need to rely on the increased value to borrow for the contruction costs – The banks can do this via progress payments e.g. Most building contracts have 5 stages; the builder invoices when each state is complete, you give the invoice to the bank, the bank pays the the builder directly.

    Profile photo of shanemattshanematt
    Member
    @shanematt
    Join Date: 2008
    Post Count: 70

    Thanks.

    It would be the scenerio that you mentioned i.e borrowing during the construction for progress payments.

    I wonder if this is a common form of finacing a new build? (borrow on the future value).

    Profile photo of BankerBanker
    Participant
    @banker
    Join Date: 2010
    Post Count: 371

    Its normal – this is how almost all house and land packages are funded.

    Profile photo of FinSpecFinSpec
    Member
    @finspec
    Join Date: 2009
    Post Count: 137

    If you have a fixed price contract, and depending on current valuation, how much you owe etc, it's possible that the bank will give you either all the money, or a percentage of the funds required to build, and complete the home.  If you have sufficient equity, often a bank will use that to fund the contructions.  Eg:
    Current valuation, $400,000, loan of $150,000.  Construction cost $300,000, approx end valuation $700,000.  Total debt is $150,000 + $300,000 = $450,000.  LVR = 64.29%.  If you earn sufficient to service a loan for $450,000, then you've got a very good chance of getting approval.
    Post your numbers if you're not sure and one of us will be sure to give you our opinion

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