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.

Did you find this helpful? Why not share this news?

Advertisement

RateCity
ratecity-newsletter

Money Health Newsletter

Subscribe for news, tips and expert opinions to help you make smarter financial decisions

By submitting this form, you agree to the RateCity Privacy Policy, Terms of Use and Disclaimer.

Advertisement

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.

How do I apply for a home improvement loan?

When you want to renovate your home, you may need to take out a loan to cover the costs. You could apply for a home improvement loan, which is a personal loan that you use to cover the costs of your home renovations. There is no difference between applying for this type of home improvement loan and applying for a standard personal loan. It would be best to check and compare the features, fees and details of the loan before applying. 

Besides taking out a home improvement loan, you could also:

  1. Use the equity in your house: Equity is the difference between your property’s value and the amount you still owe on your home loan. You may be able to access this equity by refinancing your home loan and then using it to finance your home improvement.  Speak with your lender or a mortgage broker about accessing your equity.
  2. Utilise the redraw facility of your home loan: Check whether the existing home loan has a redraw facility. A redraw facility allows you to access additional funds you’ve repaid into your home loan. Some lenders offer this on variable rate home loans but not on fixed. If this option is available to you, contact your lender to discuss how to access it.
  3. Apply for a construction loan: A construction loan is typically used when constructing a new property but can also be used as a home renovation loan. You may find that a construction loan is a suitable option as it enables you to draw funds as your renovation project progresses. You can compare construction home loans online or speak to a mortgage broker about taking out such a loan.
  4. Look into government grants: Check whether there are any government grants offered when you need the funds and whether you qualify. Initiatives like the HomeBuilder Grant were offered by the Federal Government for a limited period until April 2021. They could help fund your renovations either in full or just partially.  

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.

Why does Westpac charge an early termination fee for home loans?

The Westpac home loan early termination fee or break cost is applicable if you have a fixed rate home loan and repay part of or the whole outstanding amount before the fixed period ends. If you’re switching between products before the fixed period ends, you’ll pay a switching break cost and an administrative fee. 

The Westpac home loan early termination fee may not apply if you repay an amount below the prepayment threshold. The prepayment threshold is the amount Westpac allows you to repay during the fixed period outside your regular repayments.

Westpac charges this fee because when you take out a home loan, the bank borrows the funds with wholesale rates available to banks and lenders. Westpac will then work out your interest rate based on you making regular repayments for a fixed period. If you repay before this period ends, the lender may incur a loss if there is any change in the wholesale rate of interest.

When does Commonwealth Bank charge an early exit fee?

When you take out a fixed interest home loan with the Commonwealth Bank, you’re able to lock the interest for a particular period. If the rates change during this period, your repayments remain unchanged. If you break the loan during the fixed interest period, you’ll have to pay the Commonwealth Bank home loan early exit fee and an administrative fee.

The Early Repayment Adjustment (ERA) and Administrative fees are applicable in the following instances:

  • If you switch your loan from fixed interest to variable rate
  • When you apply for a top-up home loan
  • If you repay over and above the annual threshold limit, which is $10,000 per year during the fixed interest period
  • When you prepay the entire outstanding loan balance before the end of the fixed interest duration.

The fee calculation depends on the interest rates, the amount you’ve repaid and the loan size. You can contact the lender to understand more about what you may have to pay. 

When do mortgage payments start after settlement?

Generally speaking, your first mortgage payment falls due one month after the settlement date. However, this may vary based on your mortgage terms. You can check the exact date by contacting your lender.

Usually your settlement agent will meet the seller’s representatives to exchange documents at an agreed place and time. The balance purchase price is paid to the seller. The lender will register a mortgage against your title and give you the funds to purchase the new home.

Once the settlement process is complete, the lender allows you to draw down the loan. The loan amount is debited from your loan account. As soon as the settlement paperwork is sorted, you can collect the keys to your new home and work your way through the moving-in checklist.

What do people do with a Macquarie Bank reverse?

There are a number of ways people use a Macquarie Bank reverse mortgage. Below are some reasons borrowers tend to release their home’s equity via a reverse mortgage:

  • To top up superannuation or pension income to pay for monthly bills;
  • To consolidate and repay high-interest debt like credit cards or personal loans;
  • To fund renovations, repairs or upgrades to their home
  • To help your children or grandkids through financial difficulties. 

While there are no limitations on how you can use a Macquarie reverse mortgage loan, a reverse mortgage is not right for all borrowers. Reverse mortgages compound the interest, which means you end up paying interest on your interest. They can also affect your entitlement to things like the pension It’s important to think carefully, read up and speak with your family before you apply for a reverse mortgage.

How much deposit do I need for a home loan from ANZ?

Like other mortgage lenders, ANZ often prefers a home loan deposit of 20 per cent or more of the property value when you’re applying for a home loan. It may be possible to get a home loan with a smaller deposit of 10 per cent or even 5 per cent, but there are a few reasons to consider saving a larger deposit if possible:

  • A larger deposit tells a lender that you’re a great saver, which could help increase the chances of your home loan application getting approved.
  • The more money you pay as a deposit, the less you’ll have to borrow in your home loan. This could mean paying off your loan sooner, and being charged less total interest.
  • If your deposit is less than 20 per cent of the property value, you might incur additional costs, such as Lenders Mortgage Insurance (LMI).

Can first home buyers apply for an ING home loan?

First home buyers can apply for an ING home loan, but first, they need to select the most suitable home loan product and calculate the initial deposit on their home loan. 

First-time buyers can also use ING’s online tool to estimate the amount they can borrow. ING offers home loan applicants a free property report to look up property value estimates. 

First home loan applicants struggling to understand the terms used may consider looking up ING’s first home buyer guide. Once the home buyer is ready to apply for the loan, they can complete an online application or call ING at 1800 100 258 during regular business hours.

How do you determine which home loan rates/products I’m shown?

When you check your home loan rate, you’ll supply some basic information about your current loan, including the amount owing on your mortgage and your current interest rate.

We’ll compare this information to the home loan options in the RateCity database and show you which home loan products you may be eligible to apply for.

 

Can I take a personal loan after a home loan?

Are you struggling to pay the deposit for your dream home? A personal loan can help you pay the deposit. The question that may arise in your mind is can I take a home loan after a personal loan, or can you take a personal loan at the same time as a home loan, as it is. The answer is that, yes, provided you can meet the general eligibility criteria for both a personal loan and a home loan, your application should be approved. Those eligibility criteria may include:

  • Higher-income to show repayment capability for both the loans
  • Clear credit history with no delays in bill payments or defaults on debts
  • Zero or minimal current outstanding debt
  • Some amount of savings
  • Proven rent history will be positively perceived by the lenders

A personal loan after or during a home loan may impact serviceability, however, as the numbers can seriously add up. Every loan you avail of increases your monthly installments and the amount you use to repay the personal loan will be considered to lower the money available for the repayment of your home loan.

As to whether you can get a personal loan after your home loan, the answer is a very likely "yes", though it does come with a caveat: as long as you can show sufficient income to repay both the loans on time, you should be able to get that personal loan approved. A personal loan can also help to improve your credit score showing financial discipline and responsibility, which may benefit you with more favorable terms for your home loan.

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.

How can I apply for a first home buyers loan with Commonwealth Bank?

Getting a home loan requires planning and research. If you are considering a home loan with the Commonwealth Bank, you can find the information you need in the buying your first home section of the bank’s website.

You can see the steps you should take before applying for the loan and use the calculators to work out how much you can borrow, what your monthly repayments would be and the upfront costs you’d likely pay.

You can also book a time with a Commonwealth first home loan specialist by calling 13 2221.

CommBank publishes a property report that may help you understand the real estate market. The bank has also created a CommBank Property App that you can use to search for property.  The link to download this app is available on the same webpage.

If you are eligible for the First Home Loan Deposit Scheme, CommBank will help you process your application. The scheme helps first home buyers to purchase a home with a low deposit. You can read details about this scheme here and speak with a CommBank home lending specialist to understand your options.

How do I apply for Westpac’s first home buyer loan?

If you’re a first home buyer looking to apply for a home loan with Westpac, they offer an online home loan application. They suggest the application can be completed in about 20 minutes. Based on the information you provide, Westpac will advise you the amount you can borrow and the costs associated with any possible home loan. 

You can use Westpac’s online mortgage calculators to estimate your borrowing power. You can also work out the time it might take to save up for the deposit, and the size of your home loan repayments

When applying for a home loan with Westpac, you’re assigned a home finance manager who can address your concerns and provide information. The manager will also offer guidance on any government grants you may be eligible for.