February 20, 2014

Your home is the biggest financial decision you’ll probably make, so it’s important to understand all your options – and borrowing to purchase land and home construction is a little different to getting a mortgage for an established home.

We asked Mortgage Choice broker Debbie Worthington for her tips on financing your land and new home.

“Before you start looking at the available land, or wandering through display villages, make sure you know what your borrowing power is,” says Debbie. She says one of the biggest surprises people get is when they realise their credit report puts them on the back foot.

“Your local mortgage broker can arrange loan pre-approval, so you have a clear understanding of exactly how much you can spend on land and construction,” she explains. You’ll need to show them evidence of your current income, savings, debts and assets.

If you’re a first home buyer…

The good news is, you’re eligible for the first home buyer grant – worth $15,000, plus you don’t have to pay any stamp duty.
You won’t have used a mortgage broker before, so ask a family member, friend – or the sales consultant – who’d they recommend. You need someone to look after you and guide you through this journey.

If you already have a mortgage…

Whether you’re planning to move into your new home, or you’re buying it as an investment property, because this is a new development you’ll be eligible for a $5,000 NSW New Home Grant.

You also only have to pay stamp duty on the land purchase – not the building construction – so that’s a lot less than if you were buying the same home already built. Plus, you may also be able to use the equity in your existing property to finance the deposit amount.

How much do I need to contribute to the loan?

When you buy an established home, you need to put a deposit towards the purchase. If you’re borrowing for the land and home construction, the proportion you need to contribute toward either the land, and/or the build, varies between lenders. You can finance this amount by using the equity in your existing property, or your savings, or a gift from a parent – but you need to show you have that amount available.

What if my credit report has some issues?

It’s important to start showing you can manage your money well right now – make sure your credit cards and debts, rent and other bills are paid on time and do not go over the limit. Request a copy of your credit report online to see how you’re situation might appear to a lender – and if you have any concerns, talk with your mortgage broker about the things you can do to give it a clean bill of health.

How soon do I start making repayments?

Before you start building your new home, settlement on the land has to take place – and that’s when you start repaying the portion of the loan that purchases the land. This will be lower than your final and ongoing mortgage repayments, as your construction costs typically increase as the build progresses. However, you’ll probably be paying rent or a mortgage at the property you’re living in while construction is taking place, so make sure you budget for every stage.

What happens when the builder starts issuing invoices?

At each stage of construction, your builder will issue a progress invoice. Your broker can pass these on to the lender, and they will make that payment from your loan account. The lender will usually do two or three inspections during construction to ensure the work in the invoice has been done. They’ll also do one inspection at completion before the final invoice is paid – and then the keys are yours.

Buying land? Five things to consider

  1. Land is never originally flat. Check your block has been ‘benched’, which means it has been levelled with about a 2% gradient for water run-off. A flat block of land is cheaper to build on.
  2. Make sure the land comes with all the services you need – including natural gas, electricity, sewer connections, water and NBN connections. Recycled water is a major plus too, as it will assist with your BASIX.
  3. Check if the estate has design guidelines you will need to adhere to. This doesn’t mean that every house in the neighbourhood is going to look the same, but that the estate will retain a certain look and feel. It can also assist maintaining your home’s value for the long term.
  4. Work out whether the land size is big enough for everything you want – such as a pool or shed. If you want to play backyard cricket, 550m2 is about right!
  5. Does the location tick your lifestyle boxes? Drive around the local area, visit the local café, research the schools, go on a picnic, take a boat out on the river, go for a bushwalk and experience what the area has to offer. Ensure it is the lifestyle you’ve been searching for.

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