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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Learn more about home loans

What is a construction loan?

A construction loan is loan taken out for the purpose of building or substantially renovating a residential property. Under this type of loan, the funds are released in stages when certain milestones in the construction process are reached. Once the building is complete, the loan will revert to a standard principal and interest mortgage.

What is a building in course of erection loan?

Also known as a construction home loan, a building in course of erection (BICOE) loan loan allows you to draw down funds as a building project advances in order to pay the builders. This option is available on selected variable rate loans.

What are the pros and cons of no-deposit home loans?

It’s no longer possible to get a no-deposit home loan in Australia. In some circumstances, you might be able to take out a mortgage with a 5 per cent deposit – but before you do so, it’s important to weigh up the pros and cons.

The big advantage of borrowing 95 per cent (also known as a 95 per cent home loan) is that you get to buy your property sooner. That may be particularly important if you plan to purchase in a rising market, where prices are increasing faster than you can accumulate savings.

But 95 per cent home loans also have disadvantages. First, the 95 per cent home loan market is relatively small, so you’ll have fewer options to choose from. Second, you’ll probably have to pay LMI (lender’s mortgage insurance). Third, you’ll probably be charged a higher interest rate. Fourth, the more you borrow, the more you’ll ultimately have to pay in interest. Fifth, if your property declines in value, your mortgage might end up being worth more than your home.

What is a draw down?

The transfer of money from a lending institution to a borrower. In a typical home loan, the funds are drawn down all at once in order to buy the property. In a construction loan, the money is drawn down in several stages to pay the builders as they progress through each phase of the project. In a line of credit loan, you can draw down money up to a limit based on your loan’s available equity.

How do I refinance my home loan?

Refinancing your home loan can involve a bit of paperwork but if you are moving on to a lower rate, it can save you thousands of dollars in the long-run. The first step is finding another loan on the market that you think will save you money over time or offer features that your current loan does not have. Once you have selected a couple of loans you are interested in, compare them with your current loan to see if you will save money in the long term on interest rates and fees. Remember to factor in any break fees and set up fees when assessing the cost of switching.

Once you have decided on a new loan it is simply a matter of contacting your existing and future lender to get the new loan set up. Beware that some lenders will revert your loan back to a 25 or 30 year term when you refinance which may mean initial lower repayments but may cost you more in the long run.

What is a low-deposit home loan?

A low-deposit home loan is a mortgage where you need to borrow more than 80 per cent of the purchase price – in other words, your deposit is less than 20 per cent of the purchase price.

For example, if you want to buy a $500,000 property, you’ll need a low-deposit home loan if your deposit is less than $100,000 and therefore you need to borrow more than $400,000.

As a general rule, you’ll need to pay LMI (lender’s mortgage insurance) if you take out a low-deposit home loan. You can use this LMI calculator to estimate your LMI payment.

Who has the best home loan?

Determining who has the ‘best’ home loan really does depend on your own personal circumstances and requirements. It may be tempting to judge a loan merely on the interest rate but there can be added value in the extras on offer, such as offset and redraw facilities, that aren’t available with all low rate loans.

To determine which loan is the best for you, think about whether you would prefer the consistency of a fixed loan or the flexibility and potential benefits of a variable loan. Then determine which features will be necessary throughout the life of your loan. Thirdly, consider how much you are willing to pay in fees for the loan you want. Once you find the perfect combination of these three elements you are on your way to determining the best loan for you. 

What is a credit limit?

The maximum amount that can be borrowed from a lender, as per the home loan contract.

Can I change jobs while I am applying for a home loan?

Whether you’re a new borrower or you’re refinancing your home loan, many lenders require you to be in a permanent job with the same employer for at least 6 months before applying for a home loan. Different lenders have different requirements. 

If your work situation changes for any reason while you’re applying for a mortgage, this could reduce your chances of successfully completing the process. Contacting the lender as soon as you know your employment situation is changing may allow you to work something out. 

What is a debt service ratio?

A method of gauging a borrower’s home loan serviceability (ability to afford home loan repayments), the debt service ratio (DSR) is the fraction of an applicant’s income that will need to go towards paying back a loan. The DSR is typically expressed as a percentage, and lenders may decline loans to borrowers with too high a DSR (often over 30 per cent).

Does Australia have no-deposit home loans?

Australia no longer has no-deposit home loans – or 100 per cent home loans as they’re also known – because they’re regarded as too risky.

However, some lenders allow some borrowers to take out mortgages with a 5 per cent deposit.

Another option is to source a deposit from elsewhere – either by using a parental guarantee or by drawing out equity from another property.

Who offers 40 year mortgages?

Home loans spanning 40 years are offered by select lenders, though the loan period is much longer than a standard 30-year home loan. You're more likely to find a maximum of 35 years, such as is the case with Teacher’s Mutual Bank

Currently, 40 year home loan lenders in Australia include AlphaBeta Money, BCU, G&C Mutual Bank, Pepper, and Sydney Mutual Bank.

Even though these lengthier loans 35 to 40 year loans do exist on the market, they are not overwhelmingly popular, as the extra interest you pay compared to a 30-year loan can be over $100,000 or more.

How can I get a home loan with bad credit?

If you want to get a home loan with bad credit, you need to convince a lender that your problems are behind you and that you will, indeed, be able to repay a mortgage.

One step you might want to take is to visit a mortgage broker who specialises in bad credit home loans (also known as ‘non-conforming home loans’ or ‘sub-prime home loans’). An experienced broker will know which lenders to approach, and how to plead your case with each of them.

Two points to bear in mind are:

  • Many home loan lenders don’t provide bad credit mortgages
  • Each lender has its own policies, and therefore favours different things

If you’d prefer to directly approach the lender yourself, you’re more likely to find success with smaller non-bank lenders that specialise in bad credit home loans (as opposed to bigger banks that prefer ‘vanilla’ mortgages). That’s because these smaller lenders are more likely to treat you as a unique individual rather than judge you according to a one-size-fits-all policy.

Lenders try to minimise their risk, so if you want to get a home loan with bad credit, you need to do everything you can to convince lenders that you’re safer than your credit history might suggest. If possible, provide paperwork that shows:

  • You have a secure job
  • You have a steady income
  • You’ve been reducing your debts
  • You’ve been increasing your savings

How common are low-deposit home loans?

Low-deposit home loans aren’t as common as they once were, because they’re regarded as relatively risky and the banking regulator (APRA) is trying to reduce risk from the mortgage market.

However, if you do your research, you’ll find there is still a fairly wide selection of banks, credit unions and non-bank lenders that offers low-deposit home loans.