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Why is my loan approval a bit different if I'm building?

Buy existing, or build?

We often have clients come to us with a range of options. They might be looking to buy their first home, second home or forever home, but in many situations, there are a couple of choices to make, and a big one is "should I buy existing or should I build"?

Market conditions aside, there are plenty of considerations on both sides of the coin, so firstly let's look at these in a bit more detail.

Building a new home

  • Builds take time - from purchasing a section to choosing a builder, deciding on your new home specifications, and then the building time itself, this process can take between 4 months and 2 years. You'll need to have a plan for where you'll live and budget for paying rent (or an existing mortgage) while you're building
  • Builds generally won't require much maintenance - a new home usually has at least a 5-10 year building warranty and therefore shouldn't require much maintenance when it's newly built. This can be great if you don't have a large cashflow or have other things to focus funds on after you move in
  • There are currently some great build specific products - currently ANZ are offering "Blueprint to Build" which is a discount off the standard floating rate and allows customers to pay off their loan as quickly as they like - feel free to check out the details here 
  • Builds can be slightly easier to fund - with less restrictions on lending for construction, you can often have a lower deposit for a build providing you meet other conditions - check out more detail here around that
  • You can get exactly what you want - within a certain budget, you can choose what's most important to you and your family. It might be a large garage, high ceilings or the bricks you saw in a magazine, your builder can tailor a home to your situation and budget

Buy Existing Home 

  • You can sell and buy relatively quickly - this is often the number one reason people decide to buy existing. Being able to move from one house to another quickly can be slightly more straightforward
  • Can be cheaper option in some areas - depending on the type of property you buy, and where, buying existing can be more cost effective
  • May have to compromise on some things - unlike a build, where you can choose the things that are important to you, it can be a little more challenging to find exactly what you want when buying existing

What about getting lending in place?

Lending options can vary slightly across banks, however most lenders will need to account for a "build over run" if the property is a house and land package and there is a fixed price contract involved.

These over runs are generally around 15% depending on the lender, and they essentially cover the risk for the bank if there are any unforeseen costs at the end of the build.

For example, if you are building for $500K, the bank will assess your ability to lend a total of $575K, the cost of the build plus 15%.

This might mean your approval to buy an existing property could be slightly more than if you're looking to build.

Every situation is different

As always, it's really important to get information specific to your situation - get in touch with us and we can run through the different options for you to buy existing or build, and get loan approvals in place so you're ready to go!

- Claire, Greg & The My Mortgage Team


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