Clearing the fog around home loan options
Construction Home Loan Options
One of the key objectives in planning a home building project is to have sufficient funds to purchase the land and complete the full construction. Whilst some may be in the fortunate position of having sufficient cash reserves the majority of homeowners rely on residential construction finance to achieve their dream. So, in today’s blog we’re going to explore some key information where the building project involves a home loan.
- Australia it’s fair to say the home lending market is a crowded space! There’s an ocean of lenders offering different products, rates, and loan product features. It can be confusing, so you’ll need to do your research and think carefully to ensure the home loan product you choose is both affordable and will meet your needs now and into the foreseeable future. Whether you undertake your own research, go direct to a bank or use a qualified and professional mortgage broker it’s important to take the time and assess what’s available in the market. With over 50% of all home loans written by mortgage brokers it’s a good option for you to consider.
Home loan products generally fall into the following categories: Introductory Loans, Line of Credit Loans, Split Loans, Variable Loans and Fixed Rate Loans. (This list is not exhaustive.) Each loan type has different features and not all are available or necessarily suitable for land purchases or construction so this is where doing some research can save you money and problems.
Introductory Loans
A traditionally popular product that offers a lower interest rate for an introductory period, (usually 6 or 12 months) before reverting to a standard rate. Not all lenders offer introductory loans for construction purposes. We recommend checking out the ongoing rate as the products often revert to a higher interest rate than a standard basic loan. (Scott and Bonni’s Tip: Consider overall cost.)
Line of Credit Loans (LOC)
A product providing access to credit using the available equity in a property. LOC loans are similar to a credit card arrangement. The Line of Credit has an available credit limit and users can access the funds as needed increasing the amount owed up to the maximum limit. This product isn’t generally available for construction.
Split Loans
- for people wanting the security of a fixed rate loan and the flexibility of a variable product. The borrower may fix a set portion of the loan and leave the remainder as a variable loan. E.g. One strategy is for borrowers to fix the land component of the loan and then have the construction part as a variable loan allowing them to make extra payments and redraw excess funds.
Variable Rate Loans
The interest rate charged on a variable loan generally (but not always) moves up and down according to movements in the Reserve Bank of Australia cash rate. Variable Rate Home Loans usually allow extra payments (without penalty) and the ability to redraw any additional funds when required. Basic Variable products generally have a lower interest rate to Standard Variable products but that is offset by fewer features.
Fixed Rate Loans
The interest rate on a fixed rate loan is usually fixed on the day of settlement (with some exceptions) and remains in place until the expiration of the fixed period. Most loans are fixed for periods from 1 to 5 years although a small number of lenders have longer fixed periods. Not all lenders offer fixed rate loans for construction purposes, although variable loans can generally be switched to a fixed rate once the construction is complete.
There are many things to consider (e.g. taxation, expected period of ownership etc) before committing to a loan product so it’s important to seek appropriate advice from your accountant and/or financial advisor. The Mortgage and Finance Association of Australia (MFAA) is a national association that represents mortgage brokers. They have a range of home lending information to help homeowners including the following article that explains the difference between fixed and variable loans which is a common discussion. www.mortgageandfinancehelp.com.au/first-home-buyer-news/how-do-i-decide-between-fixed-or-variable-interest-loan
Investment considerations – If you’re planning to build a home for rental investment purposes there are other factors to consider. They make the need to get good advice from a trusted financial advisor/accountant even more important. A couple of key considerations to start you thinking include the following:
- Rental Yield – Like any good investment you’ll want to make money and maximise the return through good consistent rental income. The Rental Yield for an investment property is calculated by annual rental divided by the purchase/construction price and expressed as a percentage (%). e.g. Price $300,000. Annual rental $15,600 @ $300 per week. 15,600/300,000 = 5.2%. The higher the % the better the yield.
- Taxation – In addition to depreciation, general expenses associated with managing and running an investment property may be tax deductible provided certain criteria are met.
Rental Yield, Depreciation and Taxation etc are complex areas and require specialised advice. Highfields Builder recommends obtaining professional financial advice before making any investment decisions. The information we’ve explored today is general in nature as every person’s situation is different. Our blog is intended to give you a broad idea of the different home loans types available in the Australian market, so it’s important to explore all options with your broker, bank or financier as well.
When it comes time to plan your new home construction, then the team at Highfields Builder are ready to support you from that initial enquiry until the key handover. We’re your local home building specialists across Toowoomba and nearby regions and build quality, energy efficient and cost-effective homes for owner occupation or investment purposes. Check us out at www.highfieldsbuilder.com.au and LIKE us on Facebook @ www.facebook.com/highfieldsbuilder
This publication series covers home building, real estate, home finance and legal related issues in a general way. It is intended for general information purposes only and should not be regarded as legal advice. Highfields Builder Pty Ltd recommends that professional legal and/or financial advice should be obtained before taking any action on the basis of the general information presented in this publication.
Written and Published by www.presentprofessionally.com.au
Highfields Builder is your local home building specialist in the Toowoomba region
Scott, Bonni and the Highfields Builder team are focused on building strong relationships with customers and delivering outcomes that exceed expectations. The process of building a home can be complex and every customers situation is different. When you build with Highfields Builder you become part of a team committed to delivering the highest standards of excellence in residential home construction, from enquiry through to handover.
DISCLAIMER
This article may include information on home building, real estate, home finance and legal related issues in a general way. It is intended for general information purposes only and should not be regarded as legal advice. Highfields Builder Pty Ltd recommends that professional legal and financial advice should be obtained before taking any action on the basis of the general information presented in this publication.
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