Browse Forums Building A New House 1 Jan 28, 2013 12:28 pm Hi, this is my first post, I'm hoping someone can give me some advice. We recently bought a block of land, with a 30 day settlement. The building plans are not yet finalised so we will need to get a loan for the land first and another loan later for the construction of the house. We have saved a 10% deposit for the total house/land cost which will be around $420,000. We were told by the broker that if we put down a 20% deposit on the land we could avoid paying lenders mortgage insurance twice (once on land, once on house). He also said that if we do that, then getting a construction loan later wouldn't be a problem because the bank would look at the total value of the house/land together when its all finished and would approve the construction loan no problem. My concern is that they won't, and if we put down a 20% deposit on the land, then pay solicitor costs and stamp duty, this will leave us with zero money saved. Then if the bank turns around and wants a deposit to start the house construction, we will have to wait 6 months until we can save enough for another deposit. How does finance in this situation generally work? Will the bank want more money later to start construction? Can anyone who has been in this situation shed any light on this? Re: Bought land now, house later...finance question. 2Jan 28, 2013 3:15 pm Where are you located? Have you asked if you can extend your land settlement date? By proving you have your construction paperwork to wait for so that you can get loan approval for house and land-rather than land first and then risk not getting approval for construction... If you can show land agent or real estate you hvd working drawings etc then they maybe able to extend it... I would also approach another mortgage broker-one who primarily works with construction loans for a second opinion... Re: Bought land now, house later...finance question. 3Jan 28, 2013 7:04 pm Where are you planning to build? And how much is the land cost on its own? My DH is a mortgage broker and we also had to borrow for land and a seperate loan for construction so he knows what is usually required. However some banks/credit unions might have slightly different requirements, but generally they are pretty similar. Some banks will lend up to 85% before charging mortgage insurance, your broker should know this if he has a wide range of banks to offer to his clients. For a construction loan, the bank will normally want to see a signed building contract with tender price before they look at the construction loan. This tells them the cost of the build that has been locked in ie (fixed contract price). Plus, the bank will not look at the end price of the land/house - ie market value. That is usually anybody's guess to know the future price of a home/land. The bank will look at the price of the land and the cost to build the house and base your affordability on that price, not the market price when the build is finished in a year or so time. Your deposit amount is also measured against this price. It is hard to say whether you should pay 20% deposit now and none later, or 10% for both. However, have you already applied for the land loan? To borrow for the land, the bank will seek a valuation of the land and will lend 80% based on their own valuation (or lend higher % of the total with mortgage insurance), not 80% of the market price for the land. This happened to us, our land was undervalued by $50K to the market value, so the bank would only lend 80% of their valuation (ie $50K less) and not 80% of the market price. However we did have sufficient deposit so this was not a problem for us. But if you are hoping to borrow at least 80% of the market price, this will only work if the bank valuation is the same amount. If the valuation comes in lower, then you will need to borrow more than 80% anyway. Paying mortgage insurance for a year or two is not the end of the world, it is a means to get your own home built if you want to build now or in the near future. Then hopefully over a year or two, your house will be built and hopefully market value will increase. The you can approach the bank again, refinance on the current market value and if at that time you hold more equity and your borrowing falls below 80%, then you would no longer need mortgage insurance. However this will also depend on the area you are building, so that is why I asked. Some areas will go up in value, some might not, especially if it is a very new area. Check out market values in the area you are planning on building and see if you can find out the growth in that area over a year or two. Also look at it this way, mortgage insurance is approx 1 to 2.9% of the loan amount, depending on the bank. Say it is 1% of $378,000 after your $42K deposit - so 1 years insurance is approx $3,700 or up to $10,962. So find out the bank your broker is planning on refering your business to and find out their mortgage insurance % is. Then at least you have an idea of how much it would cost. Next, are you currently renting? So if you build now, how much rent would you save, compared to if you needed another year to save more money, that would mean paying an additional years rent. If you built now and saved a years rent, is this more then the $3,700 mortgage insurance? I would guess you would. So it might be worthwhile to pay mortgage insurance for a year or so if it is 1%, but maybe not if the % is higher and your rent is low. So crunch some numbers, talk to your broker and get more info - you might be able to work out yourselves if it is worthwile to pay mortgage insurance for a little while, or if you need to save some more money first. Hope this helps. Good luck Edit: DH has just told me you don't have to pay the mortgage insurance out of your own pocket, it can be added to the loan. We built the Wisdom Majestic 40 - moved in! Our blog - http://ourwisdommajestic40.blogspot.com.au/ Our H1 thread - viewtopic.php?t=54156 Re: Bought land now, house later...finance question. 4Jan 28, 2013 8:18 pm I was of the understanding LMI is a one off in Australia, not annual. Can anyone confirm or deny? That's the impression we've been given, and that it would usually come out of our pocket, not added to the loan? 2 Re: Bought land now, house later...finance question. 5Jan 28, 2013 8:24 pm Usually you can have the mortgage insurance included in the loan amount and it is a one off fee. You don't pay it every year like normal insurance. Most of ours was included in the loan and a small portion was part of the deposit we had to pay. If you have a good mortgage broker they will be able to find the best deal for you. Re: Bought land now, house later...finance question. 6Jan 28, 2013 8:31 pm Thanks fmac, that's pretty much what I though. Just Onewheel's post read as it being an annual fee, and given she said her hubby was a broker I did a bit of a double take! Mortgage brokers.... mmm I've got a pretty good one of them now. I kicked the bank to the kerb after submitting he application for land loan... 3 weeks later and they hadn't even looked at it. Told the branch manager nothing against them, but if that's how their mortgage centre treats customers, then no thanks. Went to a recommended broker, same business day got conditional approval and unconditional the next morning. For the exact same loan as with the bank. No LMI for us yet though- will be with the construction loan. For us I'd rather pay it, than be put back by at least 12 months saving more of a deposit. Re: Bought land now, house later...finance question. 7Jan 28, 2013 8:41 pm We were in the same position, while I loath having to pay it if we had to save to have 20% deposit we would have been priced out of the market, particularly when renting! We had a complicated application and we had unconditional approval for the loan in under a week. Re: Bought land now, house later...finance question. 8Jan 28, 2013 9:08 pm Yes LMI is a once off but i didn't think you could roll it into your mortgage. Not sure on that one. We paid 20% deposit on our land and are going to pay a deposit of approx 10% on the construction loan. Our broker gave us the same logic - pay LMI once only rather than twice. If you can get 10% saved relatively quickly I would do that because then you have a lesser amount of interest to pay on your mortgage over the life of it and you don't pay as much LMI. Once you want more than 90% financed it will cost you as much in LMI as it would to save 10% deposit. Re: Bought land now, house later...finance question. 9Jan 28, 2013 10:47 pm Ooops, sorry everyone!!!!. Yes it is a one off fee, my mistake, I obviously didn't listen to hubby properly. DH just confirmed it is a one off fee. But he did say you could certainly include the fee in the loan amount. But that could depend on the bank and their loan requirements. Some banks are taking a long time to process loan applications......even brokers are subject to these waiting times too. You are lucky seano you got approval within a week. We built the Wisdom Majestic 40 - moved in! Our blog - http://ourwisdommajestic40.blogspot.com.au/ Our H1 thread - viewtopic.php?t=54156 Re: Bought land now, house later...finance question. 10Jan 29, 2013 7:02 am SmithiesWife Yes LMI is a once off but i didn't think you could roll it into your mortgage. Not sure on that one. We paid 20% deposit on our land and are going to pay a deposit of approx 10% on the construction loan. Our broker gave us the same logic - pay LMI once only rather than twice. Did you have to pay a 10% deposit on the construction loan or did you just choose to? I don't mind paying 20% deposit for the land if we don't have to pay a deposit for the construction. It would take too long to save another 10% and considering we have $42k saved which is over 10% of the total price, I don't see why we should have to. Thanks for the advice so far everyone.....to answer a few of your questions, the block of land we bought is in Mooroolbark, VIC (Melbourne Outer-East) and it was $185,000. It was actually being sold as a house and land package through Max Brown, however because a third party owned the land, we had to secure the land first. We are still getting quotes for a few upgrades to the house so the finialised building contract is not too far off but it wouldn't be possible to get it done before finance for the land has to go through. I'm just trying to learn as much as possible about this whole process because it's my first home and a lot of this stuff can be very confusing at first. I want as many details as I can about everything, because I find that agents, brokers, banks etc etc talk about this stuff like it's nothing (because they've done it so many times) but this is mine and my partners biggest purchase so we want to get it right. Re: Bought land now, house later...finance question. 11Jan 29, 2013 9:36 am A bit of both really - the broker encouraged it, the bank preferred it and we do not want to be paying huge amounts of LMI. It's of no benefit to us and just to give you an example: having 10% deposit means we may pay $2-$3k in LMI, but having 9%-0% means we'd be paying upwards of $8-$13k. The bank then claims interest on that if you are actually able to roll it in your mortgage. If you cannot possibly save the 10% for the construction loan then talk to your broker and get a quote on what it would cost you in LMI if you did split your deposit to 10% each. I reckon it would be less than having no deposit on your construction loan and paying the full LMI on that. ETA: either way you're going to be paying extra in repayments thanks to the LMI so just remember to factor that in. you were just referred to get advice from your solicitor. This is a legal matter. Separately, why would you use a buyers agent for a house and land package? 3 42520 9 19156 This is one of the reasons I decided to go overseas for my double glazed windows. As the builder indicated, he's worked on many upmarket builds, these were the most well… 13 15091 |