Buying a finished house and building a property are two completely different options and require a different approach when applying for finance, writes Jason Arnold.

Construction financing is used for either renovation purposes or to construct a home from scratch.

It is a specialised lending option for individuals who are renovating or building a house, as it facilitates them in successfully completing the entire construction process.

This financing option is available as construction finance or a home loan with a construction facility where the bank will pay the builder in smaller parts called progress payments while building the home.

It is important to note that lenders will assess a loan application for registered owner-builders more stringently than for an applicant who appoints an arms length registered builder.

In the past, many lenders were happy to work with owner-builders. In recent times, this has become significantly more difficult given higher incidences of project and budget complications. Because of this, many bank and non-bank lenders have reduced availability of credit or withdrawn products for people that are building their own home.

In the current environment, having a clear understanding of your personal financial position prior to entering a finance arrangement as well as an understanding of the impacts the finance arrangement will have on you, your family and business are equally important.

The first thing you need to know about getting finance for your project is that banks want a lot of details and will need to verify these details when it comes to income, expenses, credit history, work experience and specific details of the property transaction you are seeking finance for. The better you plan and prepare, the smoother the finance process.

Whether your business operates as a sole trader, company or trust, we recommend taking the following steps.

Financial information

• A copy of your last two years’ tax returns and financial accounts
• A copy of your last 12 months BAS statements – Please note it is imperative that there are no outstanding tax liabilities when applying for a home or construction loan.
• A minimum 12 month budget and cash flow forecast for your business
• Statement of Assets and Liabilities
• Have a firm knowledge and understanding of your monthly living expenses
• Understand your transactional bank statements in order to cross-reference and verify your monthly living expenses
• Understand your savings bank statements in order to evidence your equity contribution, savings history and ability to manage your cash flow

Property transaction information

• Building plans: Before your home loan is approved it is recommended that you have your council approved building plans in place. This will provide the bank’s valuer an idea of the property, the layout and size of the house you are building and therefore help the valuer adopt the most appropriate value of the completed property.
• Specifications: The building specifications give the bank and valuer an idea on the types of finishes you will be using in the house and the quality of materials like bench tops and appliances. This can make a big difference in the final valuation of the property.
• Building contract: The building contract contains things like the construction stages, progress payment schedule, build duration and the price to construct your new home. Even as an owner-builder, a building contract is recommended. To further strengthen the finance application it is worth having an accurate trade breakdown, cash flow and timeline on hand to further strengthen the finance application. One of the biggest factors owner-builders need to consider is time. The longer the build takes, the more it costs.
• Extra quotes: Extra quotes can be anything from getting solar panels installed, to a pool, or additional landscaping. It is worth giving these to the bank and the bank’s valuer so they can consider whether or not these things will improve the value of the overall property.
• Sundry costs: Check with the local council and town planners on any applicable sundry costs such as connections, rates, land tax and other potential council contributions. Make sure you include these in your budgeting.
• Property values: Review the value of similar properties both ‘as is’ and ‘on completion’. Use online tools and cross-reference your own research with that of local agents. You need to minimise the risk of over capitalising. Understand your total cost base and compare this to the expected value of the property upon completion.

The aim is to get through your project with minimal financial stress. The more you plan, the better the chances of obtaining the right finance structure for your project.

Bio: Jason Arnold is the managing director at Quattro Finance and Advisory

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