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I currently have a mortgage on my house, but intend to purchase a block and build in the near future. What would be the best course of action here?
Ideally I would like to purchase the block and commence building whilst still living in the current house, but dont think i can afford to service two loans concurrently. I guess I can just about squeeze enough to meet the monthly repayments on a land only loan, but that would mean I'll still have to sell off before I can even commence building the new home?
To make matters more difficult, I dont have much equity. So is it best to sell and payout the current mortgage first, then apply for a construction loan to build? The downside is that I'll then have to rent for awhile and move house twice.
Alternatively, is it possible to get a pre-approval for both the total land and construction amount, BEFORE i sell my current house? I dont want to sell then find out that Im unable to borrow more to build
Just been through a very similar situation - first stop should be your bank's lending staff.
We had around $50K left on our loan for our current house and $100K in cash when we decided to buy a block in Feb this year (Wife's salary packaging meant we were better off not paying the loan out). We extended our home loan out to cover the purchase price of the block - loan was then 210K.
Our dream house is going to come in at around 400K fully furnished and we didn't want to be looking at a loan of 600K plus with plans for kids (a.k.a. one income) in the next couple of years, despite the bank's willingness to lend us that much
We sold our current house for $260K, leaving a gap of around $40K. We were resigned to the fact that we would need to rent for about 12 months all up. We are comfortable with the repayments on a loan of $250-300K on one income so we will extend the loan out to $250-270K so that we still have a bit of a cash buffer.
The icing on the cake is that the buyers of our current house are investors, so we got first dibs on renting our place back off them, meaning only one move
Yes, much easier if you only have to move once but not sure if this is possible in your situation.
I suggest you visit loan manager of your bank and run tentative plans past them - then you will know where you stand before you put house on market - as you say, it would be no good selling and then finding out you cant borrow required amount anyway.
Of course, if you sell, you will have to pay rent and construction loan at same time- would this be much cheaper than servicing 2 loans (and 2 council rates etc)??
We were very lucky that we could afford to stay in old house until we moved to newly built one ; we had a very large equity in old house, but if you dont have much equity in old house, not sure if this will work for you.
Make sure you factor in rises in interest rates too - looks like these are a certainty in next few months
Thanks for the replies. Yes would be great if I could rent back my home from the buyer.
Anyways, with regards to purchasing land, lets say I have loan pre-approval now and I put down a deposit on a block tomorrow (for example). The block will not be titled till December. Do you begin making repayments on this loan as soon as the valuation and paperwork gets approved (is this settlement?) OR do you only begin making repayments after the title is issued. Sorry im such a noob.
In my experience only after the land is titled - until then it does not actually belong to you
In our case we had to pay a $2000 deposit and rest when land titled.
Your loan wont be drawn until after the land has registered & title is issued. This then triggers the settlement process so the land can be transferred into your name thus allowing the bank to register its mortgage over the property. Your loan will be drawn down once settlement occurs & your repayments will commence from then.
ok thanks for the clarification guys.
Sorry I have another question. Lets say the land is now titled, and I commence building. Do you start paying principle + interest as each stage progresses, OR just interest only until final completion then P+I after that?
You won't be able to start building until the land is titled and transferred into your name.
HI,
Its interest only until loan is fully funded.
Also with bridging loan, your forced to see within a year and if you dont the bank will.
If you can afford to keep the house your in, keep it and then pay the land off too. Only sell when you decide you are ready to build.
Rent and paying off your home may be the same so see which works out better.
For us we sold then rented while our home was being built.
Good luck
oops sorry typo....i meant commence building once land is titled.
When the land is titled and you commence building you will interest only on each progress payt amount until final drawdown (handover) then your payts revert to P&I.
Some people keep the land portion of loan separate to the building section - which means your land will normally be on P&I whilst the construction is on I/O. But it is more common to roll them all into one new loan which is interest only until handover.
ah..thanks....crystal clear now
Oh I forgot to ask...in a construction loan, is the first progress payment stage usually at "slab down"?
Yes or it could be when the loan is drawndown to encompass the land debt.
Ok some update: We just got pre-approval for land only, and will be looking to get a block this weekend (hopefully the one we really like is still available).
Because of our mortgage on the current house, our broker advised us to get the land first, then once its titled (early next year) we'll put both the land loan and the current house loan on Interest Only repayments. After we settle the land next year, the plan is to then apply for an increase to our loan amount for construction.
Reason for switching our current mortgage to IO is because our P&I currently is pretty huge, and the repayments on IO would be the same as renting. This means we get to stay in our current place whilst still being able to afford paying IO on the land + IO as each contruction stage progresses. No need to move twice.
Any comments/advice welcomed.
We're in a similar situation to you, but we're choosing to sell our home and rent while we're building. I don't want the stress of trying to sell our home and accepting a price lower than we want just because we have to sell. Also, market in our area is really active at the moment. But downside is we will be forking out for rent for about 12 months.
Although you may change your repayments to interest only, my understanding is the lending institutions determine your eligibility for a loan based on P&I. Could be wrong here, but that's what I've been told....
Thanks 75etd.
Ok another update: We just purchased a block on the weekend, and got the acceptance of offer from developer yesterday. Our mortgage broker said Suncorp will not give unconditional approval until titles are released....which is in Jan/Feb next year)
We're exited but at the same time undecided if we should go ahead with selecting our builder to get contracts started, or wait till land is titled then decide. Im also concerned that if we dont sell the current house, we may not have enough capacity to increase our loan for construction anyways.
Bridging loans really scare me.
The interest rate is always high and could could get stuck between properties.
Less likely in a booming market but more likely now.
Is there any chance you can create a sale chain and make the purchase of your next house dependant on the sale of your house?