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Weapons of mass construction: is it time to build your own home?

Weapons of mass construction: is it time to build your own home?

The construction industry has gained some attention lately, with reports that the sheer quantity of city apartment developments have caused contractors to cut corners.

In a time where banks are cutting their interest rates to an all-time low and the cash rate is sitting at one per cent, could a construction loan to build your own home be a better option than buying an apartment?

The state of the Australian construction industry

In their recent report -Shaky Foundations: The National Crisis in Construction – the Construction, Forestry, Maritime, Mining and Energy Union (CFMEU) suggested that deregulation and failure to enforce building standards in high density dwellings has pushed the industry to a crisis point.

Mr Michael Lambert, author of the independent review of the Building Professionals Act, displayed concern at the Public Accountability Committee meeting on the 12th August, about the role of regulators and a lack of oversight in private certification in the building industry.

“The partial approach to accountability and registration of building practitioners results in major problems for the building certifier, who issues approval to build based on documentation which is invariably incomplete,” said Lambert.

“[The certifier] undertakes inspections of only some of the building work, relies on certification from builders and subcontractors and issues a certificate of occupation at completion of the project.”

In summary, he doesn’t believe the certification of some apartment dwellings are worth the paper they’re printed on.

Apartments on the rise

According to the RBA, between 2014 and 2018, apartments accounted for roughly one-third of all new dwellings approved for construction in Australia, up from 15 per cent in the previous decade.

Graph showing residential building approvals between 2004 - 2018 from the RBA

Mr Lambert and the CMFEU both believe the issues in construction are a consequence of the rush to build large-scale inner-city apartments. In fact, research firm Propertyology’s Simon Pressley takes it one step further, describing this deregulation in certification and resulting repair bills due to extreme structural integrity concerns as the “bubonic plague” of real estate.

Mascot Towers residents –evacuated from their homes due to structural issues in June – are still paying mortgages, water bills, council fees and rent, as they wait for the building to be fixed. Not only this, but residents are now facing the $10 million repair bill.

In light of this debacle, and other building disasters like Opal Tower, the privatisation of building certification in high density apartment blocks may put consumers off from purchasing their first home. However, if you are looking to build your own home, you could potentially avoid these issues.

Could a construction loan be the answer?

Construction loans are loans designed for anyone looking to build their own home, rather than buying an established property or one off-the-plan.

Construction loans, in a time where the quality of new apartments is under intense media criticism, could be beneficial for prospective home buyers, based on how the money is released and the interest that is charged.

There may also be less competition in buying a block of land and building your home than buying an existing home, as many are ‘turned off’ by the stress of building.

The stress of building, however, cannot compare to the stress that Opal and Mascot Towers residents must be feeling.

And, with new research from Corelogic showing Perth, Melbourne and Sydney dwelling values are 8-9 per cent lower over the past year – building or renovating your home, financed by a construction loan, could be a great way to get on the property market whilst it’s not in a high growth phase.

Before you apply for a construction loan, make sure you compare lenders to see which is the best loan for you.

Compare construction loans

Loan

Lender

Advertised Rate

Comparison Rate

Min. Amount

Upfront Fee

Construction Investment Loan

loans.com.au

4.26%

3.9%

$50,000

$0

View now

Construction Loan

Australian Military Bank

4.54%

4.58%

$150,000

$500

View now

Construction Home Loan

Family First CU

4.60%

4.66%

$20,000

$200

View now

Construction Home Loan

Freedom Lend

3.29%

3.31%

$150,000

$0

View now

Construction Investment Loan

Pacific Mortgage Group

3.09%

3.09%

$5,000

$0

View now

Data accurate as at 29th August 2019. As with all financial products, check the PDS and Key Facts Sheet for any additional fees, charges and conditions.

Payment stages in a construction loan:

Construction loans are purpose-built to cover the expenses you incur as you build your home. Money is released in stages to reflect the building process and lenders may only need a 5 per cent deposit of the total building cost to get started.

These stages are:

Slab – This amount is for building the foundation of your home, including the base, plumbing and waterproofing. This can be around 10 per cent of the total amount.

Frame – This phase is where your builder will focus on constructing the ‘frame’ of your home including the windows, roofing and some brickwork. This can be around 15 per cent of the total amount.

Lock up – This is usually around 35 per cent of the loan, and covers the elements that are needed to ‘lock up’ your home. This can include external walls, doors and insulation.

Fixing – Shelving, kitchen, bathroom cabinets, tiles, cladding and all other internal fixtures and fixings are included in this stage, and can make up around 20 per cent of the contract.

Completion – As the name suggests, this is payment stages covers the completion of the building contract. Around 15 per cent of your loan will cover this, and includes all final installation pieces, including building property fences, cleaning, painting etc.

Construction loans are typically interest-only loans throughout the building phase, and are then transferred on to a normal home loan when the house is complete. 

Should you get a construction loan and build your own home?

Building your own home has many benefits:

  1. You own the land, you are not sharing with your 100 apartment block neighbours.
  2. You can build a family home, rather than buying an apartment you might grow out of.
  3. You won’t be at risk of owing the bank money on an apartment that increases in value after you buy, as the home you build is not valued until after construction is complete.

However, you must watch out for structural issues, so that you do not sink your hard-earned funds into a building that could cost you millions in repairs.

Watch out for certifiers that cut corners

Whilst a construction loan could be a great opportunity to enter the property market, prospective buyers need to be hyper alert when it comes to building certification.

As we have seen in the cases of Mascot Towers and Opal Tower, private certifiers and contractors that cut corners do exist, and the effects of their work can be detrimental.

So, if you are going to get a construction loan and build your own home, make sure you check their building license, conduct background checks and ask for previous client reviews to make sure you trust the builder, and the certifier when you create your dream home.

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This article was reviewed by Personal Finance Editor Alex Ritchie before it was published as part of RateCity's Fact Check process.

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