So, you’ve started to do your research on potentially building a brand-new home on a vacant block of land! Congratulations – it’s a very exciting journey to commence, and one that can be very rewarding (but also very risky if you go into it blind).
Is it the right choice for you?
First things first, you need to do your due diligence on whether building new is within the realm of possibility for you – from both a timing and cost perspective.
Building a new home can mean you do get the home you want, but it’s also important to factor in the time and extra costs that come with building.
- Building a new home can take 3-12 months depending on the home you build
- Material and labour costs can vary significantly
- Vacant land can be expensive and fraught with risk (soil, site works, and registration etc)
- There may be costs for services to be connected (water, power, sewerage etc)
- You will pay stamp duty on the land (check for concessions) and build separately
- You may need to rent while you’re building
- You’ll pay mortgage on both your land, and the build, while you are renting
Take the time to understand the situation in its entirety before you make any decisions, and as always, seek professional financial advice.
Other considerations to factor in.
There are additional scenarios that you must also account for when purchasing a vacant block of land. When purchasing a vacant block of land, you must always remember that the bank may not place the same value as the actual real estate market.
For example, you may purchase a vacant block for $540,000, but the bank only values it at $510,000. This could have a significant impact on budget as you will need to tip in the difference between the valuation and the actual sales price (on-top of what you have already allocated for deposit wise).
We see this happen all-to-often where buyers pay for too much (driven by market forces), and the valuation versus sales price are significantly different. This can sometimes lead to you having to cut back on your home budget (or borrow more).
So, you've assessed the risks and you're ready to go?
Welcome to your home building journey. Now, it’s very important to remember that building on a vacant lot is more complex than a knock-down rebuild on your own land or buying an existing home. The main difference? Your loans for the land and construction components are treated as two different loans.
What does this mean?
You need to buy your land first! Again, we still recommend you do some research on the home you’d like to build, some standard costs and quotes, and anything else to equip you with the knowledge you need to make an offer that allows you to build what you want.
Firstly, you’ll purchase your vacant lot. This happens like any standard real estate sale. You make an offer, the offer is accepted, and you settle. Always engage a good lawyer to do your searches and due diligence. The bank will of course order a valuation and look at recent sales in the area prior to giving you an estimated value of your block. It’s important to note again that what you paid and what the valuation is can be different.
Once you’ve settled your land, you’ll get your mortgage – this is usually variable initially. Now you can begin consulting builders and looking to engage one.
After doing your research, it’s time to select a builder that is within your budget and aligned to your goals and objectives. This can be a very time-consuming process – with initial tender to contract sometimes taking months at a time. It can be very frustrating as you’ll be paying a mortgage for land you can’t do anything with.
After a detailed process of tendering and amending, you’ll be presented with a fixed-price building contract. This is always subject to finance, and once you, and the builder have signed it, the fully executed contract is then sent to the bank for an independent valuation to be conducted. It is important that you send everything you want captured into the loan at this stage (executed contracts) i.e. pools, landscaping, and fencing as examples.
The bank will have the independent assessor value the block of land again, and then also factors in the total build cost, and what a final ‘as completed’ value would be. The final valuation will have an impact on how much you’re able to borrow for the build, and whether or not you need to put more of a deposit in your funds to complete.
Once the valuation has been completed, you’ll be advised if your finance request has been successful or not. If it is successful, your home building journey will commence, however, it is important to note that you will make the first few payments from your ‘funds to complete’. For example, if you are borrowing $540,000 towards a build, and you are planning to contribute $120,000, you will make the payments toward the build up to $120,000, at which stage the bank will begin making the progress payments.
While your loan is being progressively drawn, the bank will only charge interest on the amount drawn down. You’ll also only need to make interest only payments. Once the final progress payment is made, your loan will switch to what was chosen at the start, and your loan term commences.
As you can see, buying a vacant lot and building new can be quite complicated, and if you do not go in with a full understanding, you can potentially be caught out. We hope this article gives you some good insight into how the land and construction loan process works.
At MAW Money, we are experts in these types of scenarios, and would be happy to discuss your property goals and objectives with you.
Ready to get started with your home loan application? Get in touch with our team today for an obligation-free chat.
