How to finance knock-down rebuild for primary residence or investment | CRE Finance

Securing finance to construct your dream forever home or investment nest egg will always involve more moving parts than a standard purchase or refinance process.

There are two main pathways to achieve the end result, each has it's own advantages and drawbacks. The below standard examples work thought this in high level detail, remembering each bank has its own specific policies on how they assess individual circumstances.

The theory remains the same for primary residence or investment property construction.

Option 1 - Cash equity release from existing home up to 80% (LVR) of current value.

• Can be achieved by refinancing to an alternative lender, use of existing redraw or line of credit

• Relatively simple process however requires the existing scenario to be relatively low LVR / high equity

• Owner engages the builder and administers progress payments to the builder upon the builders request

• Interest accrues on the full new loan amount from the first day of the build

• Below example the owner / borrower is required to demonstrate income debt servicing of new $1,040,000 loan amount

• The scenario requires $260,000 owners cash to complete the $700,000 worth of construction.

Option 2 - Construction loan with fixed price contract progress payments

• Lenders will consider loan amounts of up to 80% the current land value + fixed price building contract

• This is typically a higher amount than the equity release scenario and can reduce the owners own cash requirement into the build

• This requires the owner to seek a fixed price building contract whereby payments to the builder are administered by the bank as progress claims at certain stages.

• The typical separate stages are, commencement, concrete slab, frame, lock-up, fit-out and completion.

• These stages are formally inspected and certified by the bank as genuine before releasing funds

• The sample scenario below requires the owner / borrower to demonstrate income debt servicing on a higher loan amount $1,300,000

• Interest only accrues on loan balances as they increase over the build process

• This scenario allows the owner preserve own cash with $0 cash requirement (in theory)

Summary and other considerations

• Depending on your current cash balance and ability to demonstrate debt income servicing there a two main options.

• Constructing for investment purposes can allow the potential rental incomes into the end debt servicing exercise.

• Naturally there are upfront design , permit and initial costs to get the project to finance ready which are generally met by own cash.

• It is recommended to have demolition and landscaping costs included in fixed price building contracts as this can be simpler to fund.

• This is general advice only and take no account of individual circumstances.

• Pre-approvals are available to ascertain your borrowing power and by default construction spending power.

Tim Allen - Director

tim@crefinance.com.au

0422043443