Renovation / Construction Loans
TSC Mortgage Brokers (TSC) mortgage brokers have extensive experience in working with people seeking funding to renovate their property or construct a new one. It’s important to note that when there is building involved, lender criteria (policies) are often a lot more rigorous. Why? Because half-finished building works can create issues for lenders so they need to be certain of their approvals.
Depending on your personal situation and the policy adopted by the lender, some lenders will allow you to simply access the available equity in your home and manage the payment of invoices to contractors yourself, once works are satisfactorily completed. This type of loan is funded on an equity funding basis and is often set up as a line of credit or utilising other loan types that allow you to have cash out provisions.
Other lenders will require you to sign a building contract with a licensed builder and then fund the loan based on payments being made once the builder reaches certain milestones in the building renovation / construction process. This type of loan is funded on a progress payment basis and will require the owner/s to sign off on builder invoices before payments are made in accordance with the contract provisions.
Our experience is that lenders generally fall into 3 categories:
- They simply won’t lend for any construction at all.
- They do, but it’s not a pleasant process for the builder, our client and the broker.
- They’re experienced construction funders and have sensible policies and procedures and things generally go smoothly.
Other challenges we often encounter that see differences between lenders policies are in relation to valuations, specifically:
- The location of the property – some lenders have postcode restrictions in place based on possible historical challenges faced in the area, amongst other factors.
- Comparable sales – valuation criteria as set by lender standards compares similar properties (usually within a 15% range of the suggested figure) within prescribed timeframes for sale, in conjunction with a requisite number of sales (usually 3) within the local area.
Given the renovation/construction lending process has some additional eligibility hurdles, it’s important to have a discussion with TSC Mortgage Brokers mortgage brokers about your personal circumstances and the plan for the project, to ensure all the necessary options can be considered to help you evaluate the most suitable pathway based on your individual goals and objectives.
When you are applying for a construction loan it's important to remember:
You must use a Licensed builder
A qualified builder is a licensed general contractor with an established reputation for building homes. It will be extremely difficult to find a lender to finance your project if you are intending to act as your own general contractor, or if you are involved in an owner/builder situation.
Certified (stamped) building plans, specifications and a building contract
If construction funding is the best pathway (on a progress payment basis), you will need to submit fully certified/council approved (floor) plans; detailed specifications of materials to be used in the construction and a fully signed building contract. This will be given to the property valuer to prepare an ‘on completion’ or ‘as complete’ valuation of the property.
The final value of the house must be estimated by a Valuer
All lenders require a valuer look at the plans and specs of the house; quality of building materials and also the land the house is being built on. A value is then placed on the final construction compared to similar houses with similar locations, similar features, and similar size.
Lender policies differ greatly for renovation/construction loans
It’s important to consider that different lenders provide different options based on how focused they are on construction lending. Horror stories about stressful building projects are too common and unfortunately, some of this stress can come from the lender and the way they manage the funding side of things. TSC Mortgage Brokers mortgage brokers can help to minimise any additional headaches.
As your mortgage broker, we would step you through all of the above and any other criteria specific to your situation or lender, so you will feel confident and ready to start your build.
TSC Mortgage Brokers mortgage broker 3 top tips for construction lending:
Patience, patience, patience. Renovating and/or constructing a property can be quite complex – as is choosing the right lender to ensure it’s no more difficult than it has to be.
Try to make sure that the contract that you provide to the lender, is the final contract. Often there are lots of ongoing amendments to building contracts with additions or changes, which in turn may mean that the valuer may need to revalue the property AND the lender may need to reassess the loan once more. This could cause lengthy delays. We have strategies to help you cover small changes – however large, costly changes can stall the process for some time.
Talk to us from the start about what your big picture plan is. It’s important to be completely transparent with your mortgage broker about the complete plan for the project so we can assist you to get the right lender for the job. For example, consider whether you will require funds to cover a driveway, carport, fence, landscaping, pool etc if not covered within your contract. Delays usually mean increased costs which could come at the expense of completion of the project.