When it comes to Owner Builder finance, the devil is in the detail!
We have a sneaky suspicion this Q&A will give Owner Builders (OB) fantastic insight into the financing of an OB project.
Paul Blake from Citiwide Homeloans has over 20 years experience in the banking sector. We're thrilled we can leverage his experience approving loans for Owner Builders.
What’s the process OB’s go through when it comes to getting finance?
Step 1 Understand what you can afford
An OB usually has a rough idea of what they can afford and what they want to spend. At this early (pre-approval) stage, I like to have figures to use as a starting point.
What I’m after is:
1) Value of the block of land (if already purchased)
2) A rough idea of what they want to spend on the build
3) Estimated building cost
4) Value at the end of the build
I then work backwards from there and determine what can be borrowed and what an OB can afford based on their income.
Although the loan cannot be submitted at this point, the OB at least has an idea of what they can borrow.
Even a Licenced Builder building their own home is classified as an OB in the banks eyes.
Step 2 Get a detailed cost of the build
Once an OB has decided to go ahead, the next step is to work with a Draftsperson or Architect to get plans drawn up.
When a builder does the work on behalf of an owner, it’s the builder who gets all the associated costs and includes them in a contract. Under the OB scenario, the bank expects the OB to get the same detailed information.
There are 5 stages of a build – 1) slab 2) frame 3) lock up 4) fit-out and 5) finishing’s. The bank wants an OB to cost each of the 5 stages. It’s no use saying it’s going to be $30k to do the slab and $40k to do a frame. The banks are not interested in an overall cost – they want detail.
Once the plans are final and all relevant approvals have been obtained, the OB then needs to get detailed costs for the build for all 5 stages.
Step 3 Engage a 3rd party to determine all costs
It's here I recommend an OB engage with a 3rd party such as a Quantity Surveyor because banks like a 3rd party to sign-off on the cost of the build. The 3rd party could also be an architect, registered builder or civil engineer.
I like a Quantity Surveyor because they seem to provide the most detailed reporting and usually break it down step-by-step. The OB then gets this detailed report.
The Quantity Surveyor stays with you throughout the build overseeing each stage. They’re along for the entire ride.
A few key points:
+ If there is a discrepancy between the OB total build cost and the Quantity Surveyor's build cost, the bank will take the Quantity Surveyor quote over the OB’s.
+ It’s the Quantity Surveyor who signs off on the individual progress payments i.e. they verify that the work has been done at the end of the stage. This is an expectation of the bank.
+ The Bank also sends out a Valuer to sign off at each completed stage.
What are the main differences between a residential loan and an OB loan?
If a landowner engages a Builder to complete the entire build, it’s the builder who does all the costings for inclusion in a contract.
However, under the OB scenario, as outlined in Step 2 above, the OB has to do the groundwork and get the cost verified by a Quantity Surveyor or other 3rd party.
The other key difference from a finance perspective is if a Builder carries out the build, an owner can borrow up to 90% to 95% of the value.
For an OB the restrictions are greater. Generally speaking, banks lend up to 60% because owner building is a greater risk to the bank.
I’ve been doing OB loans for over 15 years and in that time banks have tightened up their procedures and processes for this type of loan. Mainly because there were cases where OB’s ran out of money and the build was incomplete.
This is why it’s important for an OB to understand what they can afford and have the detail to support the application.
It also really helps if an OB has equity in their land.
What else should an OB consider when going for finance?
I’ll explain my first point by giving an example (these figures are for the purpose of my explanation only). Let’s say….
Build Cost = $500k
Bank will lend = $300k (60% of $500k)
OB contributes = $200k (savings)
The bank requires an OB to use their money first i.e. the $200k per the example. When the $200k is drawn down, this is when the bank will start releasing progress payments ($300k) at each completed stage (stages of the build).
At what point the progress payments actually kick-in depends entirely on when the $200k is drawn down.
IMPORTANT: The $300k is not released upfront. The $300k is released in progress payments.
The bank does this because they will only hand over the final balance of the progress payments once the Certificate of Occupancy has been issue.
I want to point out that the $200k is not enough and thinking it is, is where some OBs get into financial difficulty.
When building, the OB needs to understand that they will be required to start putting deposits down on materials that need to be ordered well in advance e.g. walls, windows, doors and roof frame.
It’s therefore highly recommend that such deposits are covered by contingency money over and above the $200k (OBs cash).
The amount of contingency is hard to estimate because what also needs to be covered in addition to pre-ordered materials are labour costs. A very rough guide might be 10% to 20% contingency.
If a client has equity in land, this money can be drawn on as contingency.
An OB also needs to be on good terms with suppliers. Negotiate good terms with suppliers as well as your trades.
The banks golden ticket is the Certificate of Occupancy and that explains why they don’t release progress payments until the OBs own fund is drawn down.
I want to stress again, the bank will only release money at the conclusion of each stage (once $200k is drawn down). The bank will not release money in the middle of a stage if the OB runs short. It’s only at the end of a stage.
Do you have any other tips when it comes to financing?
- When you start making claims, the bank wants the detail of all paid invoices. It’s therefore in your best interest to keep invoices. In this instance, cash is not king.
- Having cash savings or equity in the land (or both) is what will make the finance process much easier.
- The bank also requires plans, permits, soil tests, insurances etc so make sure you have these.
- Even a tradesperson such as a plumber or electrician doing an OB job should follow the same process of costing a job and include his or her own time.
- Do your homework and know if you’re actually going to save money doing it as an OB.
- Be realistic about the time you have to do the build because time is money.
- Devil is in the detail!
What are your final words of wisdom?
- Finance is the easy part as far as standard rates etc. There are no loaded rates for bank products.
- The finance for all OB loans starts as an interest only loan therefore you only start paying when you start drawing down.
- It’s when you move in that the principal and interest repayments kick in (if this is what was initially approved).
- There is no mortgage insurance because an OB is not borrowing over 80%.
- Stamp duty is only charged on the purchase price of the land.
- The turnaround time for approval is usually a couple of weeks. If there are gaps in what’s provided, this can delay approval.
How good is all that OBs?
We're pretty confident this valuable information will help you put your best foot forward when it comes to financing your dream home!
A very big thank you to Paul Blake from Citiwide Homeloans for sharing his incredible expertise.
If you’d like to discuss your Owner Builder lending requirements with a Broker who’ll work hard for you, don’t hesitate to contact Paul on 1300 345 747.
* Paul Blake is a Credit Representative (No. 407353) of ratesonline.com.au Pty Ltd, Australian Credit Licence 384404.