Browse Forums Home Finance 1 Feb 15, 2010 5:10 pm I'm looking into the possibility of buying an old post-war home to knock down and replace with a project home. What are the typical Loan to Value ratios banks are handing out at the moment for both purchasing the existing house and the cost of building a project home? Can both loans be established from the start and would there be any benefits to doing it this way? Re: LVR on project home building costs 2Feb 16, 2010 3:48 pm Without mortgage insurance most builders will lend up to 80% of the value of the property (on established). The problem will be that if you tell them you are going to demolish the building then they can only value the place as vacant land. For the lender to value as a new build you normally have to provide them with a signed tender and detailed diagrams showing internal and external dimensions of the house you are building. They will then normally again value and lend up to 80% without mortgage insurance being involved. Some things are worth waiting for. Re: LVR on project home building costs 3Feb 16, 2010 3:56 pm Thanks for the reply. Just to clarify, is that 80% of the total of the original house and land (at current market value)plus the cost of the build to turn key stage? How do most people handle the extra costs after turn key? Re: LVR on project home building costs 4Feb 17, 2010 10:00 am Hello Garbage, This is a very specific scenario you are talking about here. You really are best to speak with a lender/broker regarding this. I would lean more to a broker on this one myself however. There are many variables involved here. Yes on a purchase of the property itself. You can get away with up to 90% plus costs etc. just like any other purchase. In some instances up to 95% plus costs (dependent on funder). The issue you face is that as soon as the house itself is demolished your security property underneath the loan drops in value to just the land component. This means that say for instance your loan is originally an 80% lend for the purchase. You may find yourself having to curtail (drop) your loan to the same loan to value ratio of 80%, however this is against the land value alone. An option for this is to look to get a quote from a house removal company to attend the property, destump and remove the house. The question is. Is the amount they pay for the house enough to reduce your loan to the equivalent loan to value ratio as the original lending (some lenders may have lower loan to value ratio's for vacant land therefore a larger reduction would need to occur). [NOT ALL HOUSES CAN BE SOLD THIS WAY. SEEK QUOTES PRIOR TO ENTERING INTO ANY PURCHASE CONTRACT] Once this is done you could then look at lending towards the construction of the home. Same situation, up to 90% plus costs, some lenders 95% plus costs. 90% is pretty much well the limit however. These are examples of fixed priced contract loan to value ratios for reference. If you are looking at owner building your own project these loan to value ratios drop to around 50-80% of hard costs for a straight owner builder or 80% of end market value through specific lending solutions that our company can facilitate. Either way a principle reduction needs to be made to the lending in the middle part of the process creating a bottle neck whereby funds need to be injected into the project from an external source. The information above does not take into account the following: Your deposit available, whether you are a Low Document or No Document client, location of the property, the lender involved, your credit report or lending history, your previous experience with project building, your personal details such as employment, expenses, living arrangements etc. If you would like some more specific information feel free to PM me with your details so that I can tailor the response for you and your circumstances. This is more complicated than can be answered (to a level that you need it to be) through general open forum posts. Regards, Trent Davidson Trent Davidson Property Finance Consultant Residential Lending LJ Hooker Finance Brisbane North Credit Representative Number: 387283 under Australian Credit Licence:380270 Re: LVR on project home building costs 5Feb 17, 2010 10:18 am All good to know thanks TD aside - The property is made up of land value and house value correct? The house may have a small % of the overall value some as small as 5%. I also ?? the value abopted by FInst is it less because it is now undeveloped (without a house) and becomes a liability? Where you are coming from is where you are going to... Re: LVR on project home building costs 6Feb 17, 2010 10:22 am Thanks Trent! That goes a long way to answering my question. I've sent you a PM with more details. The house is a 2 bedroom fibro shack on a 650sqm block, so it certainly has high land content, but how do you estimate how much the bank would see as land value (without actually asking them as I haven't yet purchased the house)? Re: LVR on project home building costs 7Feb 17, 2010 11:50 am The property is initiallialy security for the loan. So in effect removing the improvement takes away the habitability of the property. Dropping it into the vacant land realm. As opposed to when renovating the property is still habitable. It all comes down to what the lender could sell the property for and how long it would take to sell. If you take the property and say it is $680k with the house on it. If you remove the house it could make the land alone saleable for $600k (for round figures). This alone is the reason banks require the drop in lending. For them to take on a higher percentage of loan compared to the value increases the risk to them. Some institutions also see 'vacant land' as a higher risk again and impose further restrictions. The house removal company is a good idea. As they will usually remove the property as well as pay for it. You end up with benefit from the paid amount as well as not having to cover the demolition costs. Simply need to cover the clearing costs after removal (which most builders can put into the contract anyway and then have that as part of the lending). This would still need the principle reduction however because of the drop in security. The process itself varies depending on the lender and a loan submission with an end target such as this would be structured a particular way to reduce the costs to the client. Think of it this way. Say for instance you purchase a property valued at $600k. But you want to 'swap' it for a house valued at $500k. The problem is that your lending is already at 80% of the $600k property. If you want to swap it for the lesser value property, (whether it be land, a unit, a house etc) the very least you will need to do is reduce the lendint to 80% of the new security. 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