Borrowing options for construction

amkamz on 15/03/2021 - 19:18

Hi Ozbargain,

Just bought my first house and am looking to put a granny flat on it and had a few questions and wanted to hear your opinion. Going to provide rough numbers for illustrative purposes without going into specifics about my situation.

Current house value: 500k
Current loan: 450k (fixed for X years)
Deposit paid: 50k

I was able to avoid LMI for the existing setup.

Plan: to build granny flat that will cost 100k

The issue is, that if I want to pay a 10% deposit (an additional 10k and borrow the remaining 90k) I will have to pay LMI on the value of the entire property and not just the incremental value/cost of the granny flat.

What this means is that if the valuation comes back as 600k after completion, that I would be able to borrow up to 480k or only 30k of the 100k cost for the granny flat.

What doesn't make sense to me is that the current loan and value is approved. Also if this property already has a granny flat on it, the bank would be happy to lend me 90% with the LMI waiver.

A couple of questions:

1) Can you get a construction loan with a different bank to the main loan?
2) Are there alternative financing options?
3) Does the banks current system of applying LMI based on full value instead of the incremental value make sense?

Poll Options expired

  • 1
    Bank rules make sense
  • 0
    Bank rules don't make sense
  • 22
    OP doesn't make any sense
Financial

Comments

  • whooah1979 on 15/03/2021 - 19:23
    +1

    Borrow $700k makes sense.

    • djones145 on 15/03/2021 - 20:23
      +1

      nah borrow 2m
      buy 2 more houses
      it's freeeeee money people

      heck borrow 10m and buy bitcoin and got to the casino

  • GourmetFoodie on 15/03/2021 - 20:56

    There are a lot of moving parts here.

    I think what is screwing you is that you LVR is already so high and the bank may have had second thoughts about your risk profile hence they are reigning you back on what they can provide for the construction piece. Banks can do whatever they like, they’re not obliged to offer you the same LVR for a construction loan as for the home loan. They may also be valuing the granny flat addition differently so to them even if it costs $100k maybe the whole property with granny flat included is still only worth $580k or so.

    Yes you can go to different banks for construction loans but I think you will find is challenging because you are essentially just extending your home, not building a separately titled asset that they can ultimately hold as security and sell.

  • TheBilly on 15/03/2021 - 21:03
    +4

    Plan: to build granny flat that will cost 100k

    If you are being quoted 100k then be prepared to add 10k -15k to that figure as a contingency for unexpected costs.

  • miwahni on 15/03/2021 - 22:51
    +3

    If you got a waiver of LMI for the original loan, it would have been for a very specific reason eg first home buyer waiver that St.George was offering last year. If the requirement for LMI is waived, then no policy is put in place with an insurer, and no premium is paid. In my experience this is the case even with those banks which have their own cover. If you then increase the loan, and it no longer fits that original waiver reason / purpose then yes the entire debt will need to be covered; bank can't just go to mortgage insurer and request insurance of topup amount alone.

    It's likely not possible to fund your construction elsewhere as a secured loan; at that LVR you'd struggle to find anyone who would write a second mortgage over the property. Not even sure that a second mortgagee could obtain LMI cover on a second mortgage, I've never seen a second mortgage request over 80% LVR.

    Any alternative funding stream could end up costing dearly, most likely unsecured and short term.

    In your shoes I'd sit back and wait twelve to twentyfour months, save some money, and see what the property market does in that time. You may gain some equity due to capital appreciation over that time.

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