about two years ago i purchased a vacant block of land. to obtain finance for this i approached a mortgage broker who did a good job in securing one of the major banks to facilitate the purchase. i have been paying down the loan and i am approx 20k ahead in advance payments.
i now wish to build on my land. i approached the bank directly on this occasion (with consent from the bank and the mortgage broker) and requested finance to build a house. the bank lender told me i had to get a signed contract from a builder in order for the bank to go ahead with the loan. i had obtained pre approval and had my plans drawn up and engineered.
i was also told by the bank lender that the house had to be completed. that is: it had to be a "finished house".
the process of obtaining a signed contract was very difficult for me as i work in remote localities and i am away from my home town for long periods. despite this, i eventually got the signed contract and submitted this to the bank. the bank then sent out their "independent" valuer to asses the property and house.
subsequently the loan did not progress as the bank declined to finance on the basis the house i proposed was over capitalising. this is despite the fact that i had pre approval, and my borrowing capacity is in excess of what i would have borrowed to build.
i have since returned home after completing my contract and personally visited the bank lender last week. i was informed the proposed house would constitute over capitalisation and this would mean the bank would not carry the risk if my property was ever sold! (no thanks to the bank for a vote of confidence). i am not building for investment purposes. i am building because i want to live in my house. incidentally, i am a lenders dream in terms of income, no other debt, no dependents etc and i am able to apply for the FHOG.
at the meeting, i proposed the idea of building my house smaller (it was designed to allow this possibility: build two of the three sections). this 'cut down' version would by my way of thinking, allow me to reduce the amount i needed/want to borrow and thereby reducing the repayment amounts and consequently the bank's risk.
i asked the bank lender to speak with the valuer to garner his thoughts on the matter.
the email reply i received is in my opinion, both obnoxious and distasteful. it smacks of bias in terms of the overall construction of the house. this bias is what i understand to be the real crux of the issue. i have chosen to go for a steel frame house. not a kit home but rather, a one off designed house built with steel framing over an elevated sub floor. it meets all regulations and is universally appealing. it is modest in many respects but when completed it will be yet another example of the growing trend to build to this style both in outward appearance and construction materials and method. in short, its modern and funky!
at the meeting and again in the email the bank lender suggested i would be overcapitalising no matter how much i reduced the house by. i was also directed to approach other builders and obtain quotes for construction in other materials! suffice to say, brick and cement block is what was being referred to.
my question is this: how can i get past this overcapitalising issue with my current bank? i am not changing my house design or construction method. perhaps other lenders are not so hung up on construction materials?
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Browse Forums Home Finance  23 Jan 2012 30 not too far from the water in north queensland Junior Member 23 Jan 2012 30 not too far from the water in north queensland Junior Member Re: overcapitalisation ??? 3Aug 04, 2014 10:26 pm LVR: i was pre approved by the bank to borrow 100% required to build. i will be approaching other banks/lenders but i am curious to learn more about how the major banks "think". i thought the (somewhat overinflated) contracted price to build may have been the reason for the bank's decline to lend. whilst this does represent one aspect of the overall picture: the problem the bank has is with construction materials. no matter what i do to reduce overall costs, the issue is akin to a dog chasing its own tail: i cant improve the situation. incidentally, the bank will now accept a house constructed to meet standards to achieve a "certificate of occupancy" by the local council. therefore, i could move in without floor coverings, painting and so on. i am particularly annoyed with the bank as i now have this finance request on my credit file. Re: overcapitalisation ??? 4Aug 04, 2014 10:33 pm That does suck about having that on your credit history. So I guess they will make you take out mortgage insurance. If your going to live in the house I would strongly suggest you try to get 20% deposit to give 80% LVR. I doubt they will knock you back at that. 100% finance is always a big risk to a lender. Too many people default on their payments these days even with just a 1% increase in interest rates. 23 Jan 2012 30 not too far from the water in north queensland Junior Member Re: overcapitalisation ??? 5Aug 04, 2014 10:44 pm i intend to request the bank rectify my credit history/file. it was this bank that earlier told me i could not "shop around" to other banks seeking finance. i know this sounds stupid, but they told me this during the pre approval stage. i am completely new to all this lending business so i took their advice on face value. subsequently i have wasted a lot of time and energy and potentially put myself behind by almost a year in house construction. i feel as though i have been given poor advice more than once from this lender. my equity in the land is currently 30% of purchase price. i qualify for the 15k FHOG but this bank is unable to factor this amount as its (according to them) not a 100% certainty i receive the grant. thanks of your thoughts and comments. 23 Jan 2012 30 not too far from the water in north queensland Junior Member Re: overcapitalisation ??? 7Aug 04, 2014 11:14 pm im assuming around 150k but this is just my guesstimation. 08 Aug 2011 1,306 WA Gold Member Re: overcapitalisation ??? 8Aug 05, 2014 1:09 am Why not go through a broker who will be in contact with all banks. At the end of the day Banks are about managing risk and ensuring that their assets (loans to customers) are sufficiently overcapitalised to cover the debt should the need to sell arise. If you have 30% equity in the land, who are you borrowing through. Why not ask that lender to consolidate the land and building debt into one and that would lover the LTV. The lower the LTV you can achieve the easier the bank will lend as their risk is mitigated. I would not be offended by the language in their responses as all banks are the same or have similar approaches to lending. Hope this helps a little. 12 Sep 2009 669 Sydney Gold Member Re: overcapitalisation ??? 9Aug 05, 2014 4:45 pm Your first mistake was paying down the land. In hindsight what you should have done was pay interest only and put the remaining money in an offset account, that way you would have all that money at your fingertips. Unless someone cannot control themselves I say never pay down loans. Having the money inan offset achieves the same interest payments but you avoid situatons such as yours. Once you pay it back it's the banks money. Money in an offset account is yours to do with what you want. I hope it works out for you. 13 Apr 2012 1,196 VIC Gold Member Re: overcapitalisation ??? 10Aug 05, 2014 10:50 pm  travelbugYour first mistake was paying down the land. In hindsight what you should have done was pay interest only and put the remaining money in an offset account, that way you would have all that money at your fingertips. Unless someone cannot control themselves I say never pay down loans. Having the money inan offset achieves the same interest payments but you avoid situatons such as yours. Once you pay it back it's the banks money. Money in an offset account is yours to do with what you want. I hope it works out for you. I don't know where to start, but that's actually poor advice. Not all loans have offset accounts and most loans have redraw facilities. Most loans with offset accounts charge a higher interest rate. I will admit offset accounts is better than redraw for investment properties, but have no advantage for PPORs. Regardless, how does having money in an offset account help the OP in any way? 08 Aug 2011 1,306 WA Gold Member Re: overcapitalisation ??? 11Aug 05, 2014 11:28 pm I disagree. Offset accounts for ppor allow you to pay less interest while having the liquidity to choose what to do with the money. It also allows for use as Travelbug suggest with the provisor that one is disciplined on not touching the cash. I am not sure, other than temptation, what the down side of offsets are. Btw my rate is no different offset or not. 13 Apr 2012 1,196 VIC Gold Member Re: overcapitalisation ??? 12Aug 06, 2014 12:49 am What's the difference between an account that has a redraw facility or offset account for a PPOR? I'm never said there was an disadvantage to an offset, but can't see how an offset would help the OP in any way. 08 Aug 2011 1,306 WA Gold Member Re: overcapitalisation ??? 13Aug 06, 2014 1:42 am For one it gives you options from a tax perspective if ever the residence needs to be rented out. Once something has been repaid, interest on any redraw would been to establish the income generating ability. If it is in an offset account you simply take the money out and use it. Its about choices. While you did not say it was a disadvantage you did mention is was poor advice. In this instance had the OP been ahead in payments (I cannot remember whether that is the case) that cash in the offset could have been used as a deposit. Granted if you group the land and house together it could probably achieve the same and not enough details were given. I think offset accounts are worth doing as any spare funds can work in your favour but still provide liquidity. Each to his own I guess. 23 Jan 2012 30 not too far from the water in north queensland Junior Member Re: overcapitalisation ??? 14Aug 06, 2014 5:02 am i have paid in advance a certain largish amount of money into the loan account. it is still able to be withdrawn. in the meantime it lowers my interest on the principal amount. i do have another saving account which was set up at the same time as taking out the loan but i never use it. well i have just put some of my savings back into it as it does earn a bit more interest. but i don't think it operates in the same manner as what has been described above. i am very rigorous with my money and have no problems with managing it (not spending it!). what does PPOR stand for? my land and house are not for investment. i am building a house only once in my life and at 52 I'm certain enough about that. i have approached my broker to assist but he's a bit slack judging by the lack of response from him post initial reply. this is ok right now as i have to go back to work for my agency for 2 weeks. when i return i will be back onto the matter first hand. when i wrote about my situation in the OP i was just trying to garner some help/advice or insights into the situation as i am new to all this. i am finding (as I'm sure others do) i am making mistakes and learning as i progress rather than being armed with information beforehand. i was and still am somewhat amazed the bank has a clear bias to the type of construction. good will come of this as i have learnt just one more factor to speak about when i go to another lender! thanks to all your comments. Re: overcapitalisation ??? 15Aug 06, 2014 5:22 am Yes life is a learning curve doesn't matter what age you are. Hope you can get some resolution if not find another broker, one that wants your business. Your not a high priority client that's for sure. I 100% agree with Aussie Mark. I made the mistake of paying down an investment loan in that way and using redraw facilities. Luckily for me I redrew the funds to buy another investment so technically can still claim the tax benefit of using those funds. As far as offset accounts, shop around for the right rate you might surprise yourself. I believe offset accounts are a must as it gives you maximum flexibility and access to your funds no matter if it's investment or primary residence. Besides, the money stays yours instead of being the banks asset. Remember your money in your savings accounts are insured by the government for loss or bankruptcy by that lender. If the money is in the loan account then the lender can freeze that account if they are in trouble so you can't make withdrawals. Just be open to the idea of offsets they are worth the account fees in my opinion. 08 Aug 2011 1,306 WA Gold Member Re: overcapitalisation ??? 16Aug 06, 2014 10:13 am PPOR = Principle Place of Residence. I agree that we are all learning, I am sure that if I had not stumbled across this site I would have finished my house long ago. I am a very risk adverse person and I find that I am wanting every possible cost listed in my contract before I sign, this has resulted in lengthy delays. I am not sure why the medium of construction is taken into account when lending however I suspect it is to do with what are the generally accepted norms for the location you are building. Although the materials may be cutting edge and the ideal for what you want the bank will look at what would be their downside risk. In the worst case scenario they would assess how long they would need to hold the property before they get their money back. It is not meant to be a vote of confidence against you, it is merely how things are assessed. For example, when banks have assets they must hold capital against those assets. The amount can be reduced by collateral held however it must be eligible collateral. Even though the bank may be more than covered value wise because of the type of asset they will still need to hold capital for that loan. - it just how the system works and is nothing personal. In western australia there seems to be a clear bias to double brick.... where as brick veneer is more the mean in victora. I don't necessarily understand, but it does increase building costs. 23 Jan 2012 30 not too far from the water in north queensland Junior Member Re: overcapitalisation ??? 17Aug 06, 2014 8:01 pm hello crazy and mark thanks of your time and comments to my concerns. i haven't taken the banks refusal to offer me finance personally. it is as you say: just how they operate. i suppose i just figured i would waltz in and get a house construction loan and skip on out of the bank again! its funny really, I'm busting to get a mortgage as a means to building my home! and you are right again when saying I'm not a high priority for the mortgage broker. i will look elsewhere when I'm home again in two weeks. im not sure i understand completely the offset account so i will have to do some research on this too! I'm just not that savvy with all finance ins and outs so i do appreciate your comments. 06 Aug 2014 2 QLD New Poster Re: overcapitalisation ??? 18Aug 06, 2014 8:22 pm Judging by the description of the property you've provided and standard bank procedure, I'd say they valued it and it realised a value under the cost of the build. Commonly used term is overcapitalised and used in the sense that the property is to unique and resale will be difficult. How can you get passed this? I would try maybe get a valuation completed by yourself by a bank panel valuer like propell national valuers and ensure that it meets the costs then give that to a new bank and see if they will rely on it. Re: overcapitalisation ??? 19Aug 06, 2014 10:11 pm Good point Seethe1. I'm pretty sure you can get building surveyors or someone like that to give you a cost estimate to build. That may assist with the loan docs. There is also a company in vic called Archicentre. They may be able to help but come at a cost 08 Aug 2011 1,306 WA Gold Member Re: overcapitalisation ??? 20Aug 06, 2014 11:27 pm I think if it were me I would want to know what the sticking points are and have answers prepared to desensitize their concerns. For example, if their concerns around the building medium gather evidence to support the choice. Surely it is not the first house being built with this method. I would start with the product supplier as they have the most vested interest because if banks don't lend they don't sell. Work out exactly how much you need to complete the build turn-key and then look at what your current equity is available in the land. You want to get to a loan to value ratio where the bank is well covered. Ask what sort of discount the valuer is using because of the building material. If possible challenge the number based on efficiency ratings etc. You have to be armed with information to be able to have a calm and intelligent conversation with the bank. Pm me if you want me to explain the mortgage offset. Cheers and don't stress just need to demonstrate to the bank you are less risky than they currently have you at.  |
