Author Topic: Australia - how does buying land and THEN building a house work for mortgages?  (Read 2839 times)

HappierAtHome

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Hi Aussie mustachians,

This one's for a friend. Hopefully not a silly question, but we can't seem to find anyone who's done this in real life to ask.

She wants to buy a vacant block of land, and then contract with a builder to build a house on the block.

She understands that with a typical house and land package, you would apply for a mortgage and get finance approved for the full cost of the house and land package. However, that's not what she wants to do - she wants to pick the right block in a central suburb.

So, how would the mortgage(s) work in her scenario? Would she apply for mortgage #1 for the block of land and then mortgage #2 for the house? Would she apply for one larger mortgage on the estimated cost of the land and house together?

Should she be chatting to a mortgage broker about her options?

Thanks in advance for your thoughts!

ontrack

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Hi!

Pretty straight forward process. All major lenders in Aus have a construction loan product where the payments are drawn down based on project milestones being achieved. CBA has a great website that explains the process brilliantly:
https://www.commbank.com.au/personal/home-loans/building-a-home.html

I'd also send this fact sheet to your friend as well:
https://www.commbank.com.au/content/dam/commbank/personal/home-loans/fact-sheets/005-537-construction-home-loan-fact-sheet.pdf

My one personal piece of advice is to ensure that the building contract includes every single expense (inflate costs if required so that there's a buffer). It can be very difficult to adjust the contract mid-way if you decide to upgrade or spend more on certain items.  A new valuation is normally required if you've gone over budget which often can't be done until the house has been completed.

I hope this helps.




nnls

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My friend bought land about 3 years before building, she had a separate loan for both, with the new build being a construction loan and then I think has combined into one now the place is complete

HappierAtHome

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Thanks ontrack and nnls. Let me make sure I'm clear on this:

Step one: get mortgage from bank to buy land.

Step two: get construction loan from bank to build (noting the building contract etc as per ontrack's notes and that PDF).

Optional step three: combine loans down the track into one mortgage.

nnls

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Thanks ontrack and nnls. Let me make sure I'm clear on this:

Step one: get mortgage from bank to buy land.

Step two: get construction loan from bank to build (noting the building contract etc as per ontrack's notes and that PDF).

Optional step three: combine loans down the track into one mortgage.

This is the way my mate did it, I am not sure if its the only way. You may be able to get a combined one straight up with part of it being a construction loan if you will be building straight away.

englyn

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I have done this. Like, 3 times. Ontrack is right, but also, just talk to a broker already, they make it very simple and usually save you money in the process, consultation is free to you, and they usually come to you. I can recommend one, a friend who is a lovely lady and very on the ball.

HappierAtHome

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Thanks ontrack and nnls. Let me make sure I'm clear on this:

Step one: get mortgage from bank to buy land.

Step two: get construction loan from bank to build (noting the building contract etc as per ontrack's notes and that PDF).

Optional step three: combine loans down the track into one mortgage.

This is the way my mate did it, I am not sure if its the only way. You may be able to get a combined one straight up with part of it being a construction loan if you will be building straight away.

Thanks!

I have done this. Like, 3 times. Ontrack is right, but also, just talk to a broker already, they make it very simple and usually save you money in the process, consultation is free to you, and they usually come to you. I can recommend one, a friend who is a lovely lady and very on the ball.

Cool! I'd love the recommendation if you don't mind PMing it to me? My friend has never bought a house at all before (not that that's surprising at my age) so she's starting from scratch with building her knowledge of the process.

HappierAtHome

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Thanks ontrack, nnls and englyn for contributing to this thread. Just sent through the info to my friend and she's psyched to have a starting point for the process now :-)

marty998

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Does she currently own and live in another property?

She may be up for a land tax bill if she's going to hold the vacant land for longer than whenever the assessment date is for land tax in her state (WA?)

HappierAtHome

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Does she currently own and live in another property?

She may be up for a land tax bill if she's going to hold the vacant land for longer than whenever the assessment date is for land tax in her state (WA?)

Nope, first time buyer. Her plan is to build as soon as she's bought the land, but I'll double check land tax here just in case.

arebelspy

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Tell her to create an account and keep us updated on the process along the way!  ;)
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marty998

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Does she currently own and live in another property?

She may be up for a land tax bill if she's going to hold the vacant land for longer than whenever the assessment date is for land tax in her state (WA?)

Nope, first time buyer. Her plan is to build as soon as she's bought the land, but I'll double check land tax here just in case.

Oh of course, I didn't see your last post :)

Send her over to propertychat.com.au as well. Aussie Realestate forum with lots more useful advice from experts.

Spiffsome

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I've sort of done this - we bought a vacant block of land and then borrowed the money to move a house onto it.

The only hitch for us was that we needed a really high deposit to buy the land in the first place (40%). Possibly due to being first-time buyers. The way it worked for us was:

Step 1: get a mortgage over the land. The bank is unlikely to lend more than 80% of the value of the land on its own.

Step 2: spend a year paying off that mortgage to establish a payment record.

Step 3: apply for an extension of the same mortgage to cover the costs of the house.

syednaeemul

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Hello I did this. I bought a piece of land on a land loan, then took out a construction loan on a new mortgage when I started building. The new mortgage basically "paid out" the previous amount; it's close in structure to a refinance with a larger loan amount.

With a construction loan, the bank will pay out (and increase your loan amount) according to the house build stages: this means that you don't end up having to pay interest on the full final loan amount right from the get-go.