Many of our clients choose to purchase a house and land package but are confused as to how the process works. In the context of a house and land package acquisition, we need to look at the land acquisition followed by the construction loan. They can be done separately but it makes a lot more sense to organise them together to give the purchaser certainty about obtaining finance.
Financing a house and land package differs slightly from financing an established property. It’s a bit more intricate than a standard loan and at times creates confusion if not understood properly.
Financing a house and land package is usually done in 2 steps:
• Step 1: Acquisition of land.
• Step 2: Construction of the house. Essentially a construction loan is usually a variable loan where funds are drawn down in stages based on the progress of the construction. Generally there are 5 progressive payments. A licensed builder must be contracted and a fixed price tender in required as part of the application process.
Also note that during the construction period the loan is interest only. Once the property is completed this can be reverted to principal & interest repayments.
Finally, although it is not directly finance related, stamp duty is much cheaper on a house and land package acquisition compared to an established property, because stamp duty applies to the land component only.
What are the most important things to consider with construction finance?
• As explained above, financing a house and land package is a bit more intricate than a standard loan. Therefore, it is best to use a broker who is competent with these products! There is a vast array of construction loans out there with many different quirks, and limiting yourself by going directly to a bank is not the best way to do it.
• The building contract (for the construction loan) needs to be a complete fixed contract. A bank will not lend if the contract is only for an incomplete build.
• Own source of funds needs to be used initially. Banks release the loan only after the own funds have been released.
• Buyers should make sure that finance is unconditionally organised for the whole package, not the land first and the building second. This could lead to surprises if the lender does not value the house to the contract value.
• Buyers should make sure that the contract has all the necessary inclusions. If the buyer wants to have it financed by the banks, it should be included in writing in the contract. Any alteration to the plan will be paid out of pocket.
• During the construction phase, banks/lenders will require monthly payments of the interest on the portion of the drawn down loan. Buyers will need to budget for this. If you have the right people in your team, the lending process can be stress-free and less confusing – Nine Ten Finance can help and guide you work throughout the entire process from start to finish.
Happy Investing
About the writer – Denjola Bhutia is an residential property investor and owner of Nine Ten Finance. If you’d like to have Denjola provide advice on your finance structure and investment strategy, simply get in touch with him – it’s a FREE service with no obligations.
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