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Owner builder home loans
As an owner builder, lenders will make you jump through hoops to qualify for a home loan. But there are steps you can take to maximise your chances of being approved.
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Australian lenders are conservative when it comes to providing home loans to owner builders. They tend to be sceptical of your ability to not only manage a budget but also manage a complex and long-term construction project. For them, it’s risk galore.
If you meet stringent lending criteria such as having enough equity, savings or a guarantor willing to offer security for the loan, you may have a better chance of being approved for a home loan application.
How to maximise your chances of being approved
- Effective budgeting. As part of your loan application, most lenders will need to see a cost estimate for your project. You’ll need to ensure the numbers are as accurate as possible, and you should always include a 10-15% contingency buffer. Unless you're a licensed builder, most banks won’t lend you more than 60% of the build cost, so it’s important that you don’t run out of funds midway through construction.
- Pre-approval. It’s wise to seek pre-approval before entering an owner builder arrangement. Pre-approval will give you an idea of what your maximum loan-to-value (LVR) ratio will be, which can help you decide whether or not it’s the right decision for you.
- Be patient. You’ll need to wait until your home loan is officially approved before you can start construction, and most lenders won’t approve your loan if you’ve already started the project.
- Seek advice. Before you apply for finance, it’s a good idea to seek advice to determine how much you can afford to borrow and whether or not you’re likely to be approved for a home loan application. Speak with a financial adviser and accountant to help with your budgeting as well as tradespeople or project managers before commencing.
How much can I borrow?
If you’re a licensed builder, you can generally borrow up to 80% of the construction cost for a full doc loan. If you’re not a builder, you can generally borrow 50-70% of the construction cost, so you might need sufficient savings or a gift from a family member.
Why is it so difficult to qualify for a loan?
Some lenders are concerned about lending to owner builders because of the likelihood that you may go over budget or not complete the build. However, if you’re a licensed and experienced builder, you may be seen as a less risky borrower.
How does an owner builder loan work?
If you’re approved for an owner builder loan, the lender will release the funds to you as progress payments rather than in a lump sum as it would with a standard mortgage. As you complete each stage of construction, a valuer will assess the work and then authorise the lender to provide the next progress payment.
What documents will I need to supply?
For an owner builder loan, you’ll need to provide more documentation compared to a traditional mortgage, such as:
- A copy of your owner builder permit
- Your project plan
- A construction cost estimate
- Your budget
- A copy of your builder’s insurance
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