Browse Forums Home Finance 1 Aug 09, 2010 3:57 pm Just wondering if anyone can tell me if I can use equity on my land towards my construction loan to avoid LMI?? I have recently purchased a block in Stage 1 of a new estate with titles due in approx March 2011. Judging by Subsequent Stage release prices, my block has given me approx $10k in equity so far and I would conservatively say i will have at least $20k in equity by the time titles are released. I have signed up with a builder to start immediately on receiving titles so I imagine I will need to have unconditional finance before titles are released. Will the bank re-value the land at this time or use the purchase price of the block in the LVR?? As the land will not officially be in my name at this time I am unsure if i can use any equity the block has made (if any) towards the total LVR to avoid paying LMI. If any finance gurus can help it would be much appreciated. Re: Land Equity 2Aug 09, 2010 4:05 pm Hi there, when you go for construction the lender will normally do a total valuation Eg. re-do the land and also include the building contract. The LVR is based on the total valuation. I found that the land had increased quite a bit but the valuation on the build came in less. Overall was still in front. Re: Land Equity 3Aug 09, 2010 7:14 pm If you can let us know the estimate land value (be conservative, it will be a bank valuer determining the value!), estimate construction cost and estimate amount you will owe on the land at settlement then we can work it out for you. Also if you signed the contract to buy the land recently then it is likely that a bank valuer will just come in at the purchase price regardless of if it has gone up in value or not. Re: Land Equity 4Aug 10, 2010 9:07 am Here's some background to clarify my situation - I purchased the block in June for $188000 (640sqm) and paid 10% deposit ($18800). Latest land release has blocks of 495sqm for $190000 so conservatively I would say I have about $10k so far in equity and I believe i will have at least $20k by the time titles are released. Titles will not be released til approx Mar 2011 at which time the balance will be due. Construction cost is estimated to be $200k and I am hoping to start building immediately on title release which I believe means that I would need my construction loan approved before the land is in my name. I don't think I will need to secure my loans until closer to title release (the closer the better as far as I am concerned), so early 2011 but am seeking clarification from the builder on this at the moment. I will have about $40k in savings to further contribute to both loans so will fall short of the 20% deposit needed for both land and construction loan, hence the question regarding whether I can use any equity in the block to make up the shortfall. Thank you for your responses and I hope that clears up my situation a bit better. Re: Land Equity 5Aug 10, 2010 9:12 am When I was doing my home loan... westpac and several other banks would not take equity in the land into consideration for any land holdings owned (so that means from the point of settlement) less than 12 months. Re: Land Equity 6Aug 10, 2010 9:28 am Titch101 Here's some background to clarify my situation - I purchased the block in June for $188000 (640sqm) and paid 10% deposit ($18800). Latest land release has blocks of 495sqm for $190000 so conservatively I would say I have about $10k so far in equity and I believe i will have at least $20k by the time titles are released. Titles will not be released til approx Mar 2011 at which time the balance will be due. Construction cost is estimated to be $200k and I am hoping to start building immediately on title release which I believe means that I would need my construction loan approved before the land is in my name. I don't think I will need to secure my loans until closer to title release (the closer the better as far as I am concerned), so early 2011 but am seeking clarification from the builder on this at the moment. I will have about $40k in savings to further contribute to both loans so will fall short of the 20% deposit needed for both land and construction loan, hence the question regarding whether I can use any equity in the block to make up the shortfall. Thank you for your responses and I hope that clears up my situation a bit better. Ok this is how it will likely work. Your lender may value the land higher than the purchase price as the time between purchase and settlement is around 12 months. There must be very good comparable sales, i.e. properties similar to yours that have sold for a higher figure. Note that some lenders use the lower of the valuation or purchase price, so see a broker and get them to help you apply with a lender that will use the valuation instead. Lenders have policies as to how long ago the contract needs to be signed before they will use the valuation only. Most need 12 months or more, some can accept as little as 3 months. So lets assume they value your land at $200,000. Here is how the figures would work: Land purchase price: $188,000 Land value: $200,000 Construction cost: $200,000 Estimate on completion value: $400,000 Total funds required: $388,000 Deposit paid: $18,800 Other savings: $40,000 Total contribution: $58,800 Loan Required (Shortfall): $329,200 Loan to Value Ratio: 82.30% Estimate LMI: $1,741 to $3,014 depending on the lender you use. I would recommend that you consider the following options: * Try to come up with a little more money. If you can reduce the loan to just $320,000 then you can avoid LMI entirely. * The valuation is critical in your situation! I would strongly recommend that you go with a lender that allows you to order the valuation up front, even if it costs you a small fee. You can then choose the lender that gives you the best valuation on the land. A mortgage broker can help you with this. * Talk to the selling agent around the time the valuation is being done and ask him to help you come up with a list of recent comparable sales, provide this to the valuer to make sure he doesn't just come back at the purchase price. * If you are going to end up paying LMI it pays to shop around. Again a mortgage broker can quickly let you know which lenders will have the cheapest LMI for your situation. as you can see in the above figures there are quite large variations. Note that lenders that use Genworth Financial for their LMI may charge you extra LMI on the construction portion if you do not apply for the construction loan at the same time as the land loan. This is because it would be considered to be a loan increase which is charged a higher premium rate. Good luck, hope that helps! Let me know if I have misinterpreted any of your figures. 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