How To Build Using Financing/Equity To Improve Your Lifestyle

Sam Ayliffe at Astute Financial offers invaluable advice on how to meet the costs of renovating and rebuilding.

Astute Financial caters for all types of lending requirements - home loans, investment loans, car loans, bridging relocation loans, leases, reverse mortgages for seniors, equity loans, and construction loans.

Astute has been the preferred financier to one of NSW largest builders, Rawson Homes, servicing their Sydney, Canberra and Newcastle client’s regularly. 

With the amount of construction going on in Sydney, they also have an experienced specialised team ready to assist you.

DID YOU KNOW:

·       Often people don’t know where to start with construction loans. 

·       Often they feel they cannot afford renting and a mortgage while they build. 

·       Often they feel like they are penalised on a higher interest rate simply because it is a construction loan.

·       Often they think they don’t have the equity to be able to build a brand new home.

·       Often they don’t think of the ancillary costs associated with building.

·       They also think they are up for $$$ interest in day one, and don’t understand 

·       progress payments’ and how the interest is calculated and charged.

But Astute Financial has done it personally and for their clients and friends, they are there to hold your hand and guide you through the process.

If you are living in a stunning Northern Beaches suburb (or anywhere in Sydney), but living in an old tired home and wondering how all these people can afford to knockdown and rebuild, or raise money to renovate, or simply want to know if you too can afford to, then Astute financial is here to assist.

Where to start: - Get some quotes.

·       Builders will quote on your ‘site’ and give you a cost estimate to knockdown rebuild, or renovate.

·       You need to know their numbers, then we can discuss financing it.

TIP: Whatever the cost, add 20% for extra expenses - driveways, painting, moving in and out costs, storage, and even refurnishing. A new home (or renovation) looks great with new accessories.

Cost of a mortgage and accessing funds for construction

If you have had your loan for a couple years, you are probably paying too much on that anyway. Rates two years ago saw in the 5% range. 

Today we are seeing 3.75% available to fix and variables similar. 

This 1.25% example gap:

A $500,000 mortgage interest charge at 5% is $2083 per month.

This same REPAYMENT of $2083pm at 3.75% is equivalent to borrowing a total loan of $665,000 for similar $2083 interest charge.  

YES, your interest charge is the same but YOU can have another $165,000 to renovate your home - for the same monthly interest charge.  

Significantly though, interest is only charged on what you have drawn, so on a $500K construction loan, that has only had the slab poured, you would only owe the builder around $100K and the interest charged is only on this initially, then frames, then brickwork, etc. as it builds the interest grows as it is drawn.

(note, this is about $80,000 in extra funds to have a similar Principal and Interest charge from 5% down to 3.75%… still significant)

Rates are available for construction at these low 4% levels too.

I have an old house worth $1m. I owe $600k. How can I get a knockdown rebuild construction loan of $500k?

We have access to the Banks and their valuers. First we qualify you based on your income and your expenses, to make sure you can afford the month repayment in your budget.

Once you demonstrate this is achievable, we can have the bank approve your $1.1m loan on your current ‘cottage worth $1m’ as a PRE APPROVAL to go and source your builder contract and plans.

Here is the key… once we get your contract and plans, we can ask the approved bank to value your new property, as if it is complete. This means you can access the equity now as they should hope to value it around the $1.5m value, allowing a loan of $1.1m to fit under their LVR (loan to Value Ratio’s) policy of 80%.

Where do I live and most importantly how do I afford to pay the mortgage and rent?

If you have equity, we can assist by tailoring your lending to your needs.

Given the banks will lend up to 80% LVR depending on your budget and affordability, we may be able to access a buffer or extra funds to assist with those interest and rent costs per month.

If you can comfortably afford the repayment now say $5,251pm, but the added rent of $3,000pm will strain your budget, let’s assist and pop 12 months of rent aside to allow your stresses to be measured, i.e. $36,000 covers rent without you even having to worry if you have unexpected bills. 

Why is a knockdown rebuild, or renovation, a good idea?

If you love your location, just not your home; a renovation or knockdown rebuild, you are generally putting every $1 into added value.

·       No agent’s fees for selling.

·       No Stamp Duty to the Government for buying

·       No legal’s fees to changeover.

On a $1m sale to a $1.5m purchase, these fees could amass $100,000 changeover costs.

Unless you want a new suburb or a new street, this is another reason why there is loads of construction going on right now.

A few final tips: BUDGET for your monthly repayment guide:

Regardless of what rate and repayment you have, ALWAYS ask for a repayment on a rate of around 6%.

Why? The average rate over the past 10 years has been around 6.5%. 

If rates move back there one day you WANT to KNOW you CAN STILL AFFORD your home.

Example $1.1m at 4% Principal and Interest is $5,252 pm

at 6.5% it is $6,952 pm… use that as a guide, as banks will qualify you at 6.5% levels as our banks are rather responsible with their lending practices in Australia.

Always get some quotes and use a Licensed builder or tradesperson.

At ASTUTE FINANCIAL, we do the comparing for you all the time, we have almost 30 lenders to choose from to ensure you get a great deal.

* Rates are quoted as a guide only and not specific to your needs, circumstances, or ability to borrow. Treated as a guide only and general in commentary.


Astute Financial Services
2B Francis Street, Dee Why 2099
(02) 9984 1911 | 0414 976 865
astutefinancial.com.au