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Construction Loans

Lenders assess loans for construction finance by adding the value of the land to the value of the quote to build. They then compare this figure to recent sales of similar properties in the area. If the purchase price of a block of land is $200,000 and the quote to build a $350,000 the end value would be assumed to be at least $550,000. The bank however will also look at recent sales in the area and if, for whatever reason, several properties of similar quality have been sold at $450,000 within the last few months the bank will assess based on the debt level against the lower amount and assess the risk according to that, this may mean mortgage insurance could be applied. Interestingly enough if recent sales indicate that properties have sold at $650,000 the bank will still assess based on the $550,000 ‘hard cost’ price.

The process for gaining approval for a construction loan can be lengthy. Purchasing the block of land is the first stage however at that point it is wise to also know that your financial position allows for the build and that the bank accepts that the building you have in mind will be worth the cost involved in construction. A full application for purchase may be lodged at the same time as a preapproved application for the construction stage. For the preapproval, an estimated cost will be required. Estimates are just that, and they have a habit of increasing when the final quote arrives from a builder. As a guide, allow between a 5-10% increase to the estimate for the final quote from the builder.

Typically, paying interest on a vacant block of land has no negative gearing benefits since there is no rental return, therefore the repayments are simply out-of-pocket expenses.

Since the lender is assessing two parts to this deal extra time is generally required. There are other factors which also need to be considered. The team at Blue Mountains Mortgage Brokers are happy to provide you with the information you need.

Loans of for owner builders, kit homes, and relocating a home all have particular restrictions. It is essential that you gain the right information before you make any kind of commitment to a project of this kind.

Release of funds for construction lending also has specific requirements. These need to be considered when structuring any finance.

Knowing the current value of a block of land already owned as well as the value of similar properties after building is crucial to knowing what financial options you have.

RP Data provides information regarding actual sale prices. Real estate agents and the land titles office have access to this online service. They update information regularly and since Blue Mountains Mortgage Brokers subscribe we also have access to these statistics. For a free property report or information on the correct financial structure for your situation, simply contact the office.

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