Tips before taking an Owner Builder loan
Being an Owner Builder is both a challenging and exciting process.
With any major life decision, it's a good thing to understand a few ins and outs to help with the decision making process.
Finance is one of those things because when it comes to an Owner Builder loan, things are a little different compared to a loan under the scenario of contracting a registered builder.
1. Work out what you can afford
You need to get a rough idea of what you can and want to spend on your build. This is what a bank or mortgage broker will want to understand in the very early stages of finance.
If you have a block of land – what's the value? Do you have savings to draw on? What's your estimated build cost?
A great start is getting your hands on our free budget planner. It will give you an idea of the costs involved in a build. Email us at firstname.lastname@example.org.
Oh, and your bank/broker will be super impressed if you have this filled out in the pre-lim stages!
2. Understand the difference between a Residential loan and an Owner Builder loan
This point can really catch people out.
The key difference from a finance perspective is this – if a registered builder carries out the build on your behalf, an owner can borrow up to 90% to 95% of the value.
But for an OB the restrictions are greater. Generally speaking, the banks will only lend up to 60% because owner building is a greater risk to the bank.
Don't let this deter you. There's more than one way to skin a cat!
3. Understand the deposit process for materials
An OB needs to understand that they'll 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.
The tricky part is, 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.
Another good tip here is to negotiate good terms with suppliers.
4. Understand the progress payment process by the bank
Here's another unknown.
The bank requires an OB to use their own money first i.e. cash before the bank pays up.
When your own money is drawn down, this is when the bank will start releasing their progress payments. These progress payments occur at the end of a completed stage of the build.
Not sure about the stages of build? No problem – simply click here to learn more 🙂
Okay, so these four points give you a taste of the finance side of things.
If you want to learn more, we highly, highly recommend you read our Q&A with our in-house Mortgage Broker, Paul Blake – click here.