Want some important tips for your home mortgage loans process?
Construction loans require specific considerations, which may impact how you go about your project.
Watch the video to learn more about what is involved when financing your home renovations or new build.
In this video, I speak with Amy Beattie, Mortgage Broker and owner of Good Green Home Loans.
Good Green Home Loans is here to help you find the right home loan at a great rate – using only environmentally responsible lenders who aren’t using their profit and power to support the fossil fuel industry.
In this video, I asked Amy what do you need to consider with financing, and reviewing construction loans for new homes or renovations.
So let’s dive in.
Amelia Lee + Amy Beattie (Good Green Home Loans)
[Amelia Lee]: When we’re looking at construction loans for new homes or for renovation projects, what do people need to consider when thinking about their finance? You’ve touched on some things already. Is there anything that might trip people up or that they might not be aware of in terms of understanding that construction loan process and how that might work for their project?
[Amy Beattie]: Yes, so for me it only comes down to one really key thing and that is lots and lots of research. And being really informed on sales, the market that you’re building in or renovating in, and current information on comparable properties and understanding what comparable properties mean.
Because, unfortunately, building to the highest standard of BAL level, again it comes back to that very first question, doesn’t necessarily translate to a property that’s more highly valued by the bank, with the method that they use for valuing properties.
But in all honesty, in terms of when you put your property on the market for sale as well, buyers don’t necessarily, or will be not necessarily willing to pay as much as you did to get it to where it is when they’re looking to buy it. And especially in the circumstances where somebody has experienced hardship, they have to sell their property for financial reasons and therefore need to sell quickly, you’re very unlikely to recover the costs.
So that’s the biggest one, it’s understanding the market early, before you’ve even begun your project, to understand what the value you’re likely to be limited to is going to be, despite what you believe your property’s valued at the end. So that’s the big one.
And when it comes to comparable, that’s things like number of bedrooms, number of bathrooms, floor size, block size, location, and quality of the work which is all of these extra things you’ve put the money into, they’re important. But a home that’s been constructed cheaply can look very nice and be sold quickly by the right agent with a wonderful wide lens camera and the gift of the gab.
So it doesn’t, like I said, it doesn’t always translate. So lots and lots of research, and I’m a spreadsheet queen. So you can only imagine when I’ve been out there looking to buy property or even dreaming about my own dream home eventually. I’ve got a spreadsheet full of comparisons. And you know, it’s not going to be necessarily your property that the bank’s value will align to, it’s going to be what sold.
So yes, that’s the big one. What else… The other thing was just that contingency side of things because if you watched an episode of Grand Designs, let alone every episode of Grand Designs, even the best laid plans are very unlikely to be perfect despite lots and lots of research, because there’s just little things that you can’t control, and that come up. There’s things you can control too.
But having spare money that is not assigned for the landscaping at the end or the fence, or the little things that you think ‘we’ll fix those up with the spare money, the contingency’, you need the contingency to be for that unknown things. And you’ve got to be really realistic about how big the contingency bucket needs to be. And I would say it needs to be nothing less than sort of that 10 to 20% realm. You would probably know better than me that that one.
[Amelia Lee]: And is there anything else that people need to consider as part of that? I know that one of the things that many people get surprised about, and I often talk to them in terms of that actual process, is that the bank needs to see their building contract. And be able to see what the payment, the progress claims are.
And in the work that I do with helping members inside my online courses, it’s really about saying to them, you need your bank to look at what those Progress Claims are, what the definitions are, and so that you’re all on the same page about what you expect to see finished on site at each of those progress claims, so they don’t get caught out with, say, Lockup Stage. And the bank has one definition for what Lockup Stage means, but the builder has another definition.
And it means that the progress claim … That the bank refuses to pay the Progress Claim until the builder has done more work, and the builder is saying ‘Well, no, this is what the Progress Claim is for and I’m not going to do more work until I get paid for that one’.
How do you navigate that process when somebody is about to go and get a construction loan, and you know that they’re needing to sign a contract with a builder and sort of pulling all that information together to give to the bank to get certainty around that?
[Amy Beattie]: Yeah. So there’s… It’s twofold I guess. The banks will, for the most part, only work with a project that is a fixed price contract. So if we’re not talking about a fixed price contract, you’re almost certainly going to find it very hard to get financed unless you’ve got lots and lots of equity.
So, fixed price contract. Your contingency, which is completely separate from the budget entirely that the bank is working with, if that’s enough to cover every progress payment, then the main thing that the bank will want to say is that when they get to a particular point of a project, sorry, a progress payment, is that that work has been done.
If you pay for the work in advance with your contingency, then the bank will refund you for the work that’s been done. So again, it comes back to that. If you’ve got the contingency, then if the bank says they won’t release the money, you can use a contingency to do that, and then be refunded by the bank so that it completely mitigates that.
But I’ve had so many conversations over the years, I’ve been writing or helping people get home loans for sort of 15 years. The amount of times that I hear at the start of a project a client’s say how much they’ve heard progress payments by the bank, it’s a nightmare and the banks just make it difficult. Ultimately it’s difficult because they don’t want you to find yourself in a position where you’ve said ‘go ahead’ to the builder, and he’s done a whole bunch of work that shouldn’t have been done yet that he’s spent money on when he shouldn’t have because that wasn’t part of the contract.
So when the bank is being really nitpicky at the start before they release any money, it’s to avoid you finding yourself in a tricky situation with the builder, like that. So yes, I think it might be tricky at the start, but if the bank is doing everything right, you won’t find yourself in that position.
[Amelia Lee]: Yes, that’s fantastic. You know, my other business Live Life Build, we talk to builder members about the importance of actually having the homeowner present the contract to their lender, and getting a letter from the lender that they’ve seen the contract, that they agreed to the progress claims, so that you’ve got that documentation up front.
Particularly when you’re working with a broker, sometimes, some brokers don’t manage the communication as well. And so that stuff can fall through the cracks. But it’s just that case of understanding and getting all your ducks in a row right up front.
Because obviously, once construction starts happening, the last thing you want to experience is delays because somebody’s not paying a progress claim, or there’s difficulty around getting money to where it needs to go. That’s when things cause real headaches. So to get… Just to spend that, obviously that extra time in those upfront stages is so crucial to things then running smoothly.
[Amy Beattie]: And talking about the things that can go wrong at the start so that you can plan for when going wrong, and be ready, I guess.
[Amelia Lee]: It’s great.
This interview is part of our Rebuild + Build Better series.
Be sure to stay tuned as we share more information and expertise in helping you rebuild after bushfires, or build homes more resilient to climate conditions and in bushfire prone areas.
Resources mentioned in this video:
Get in touch with Amy here >>> https://www.goodgreenhomeloans.com.au/