Financing your owner-builder project / by Daniel Broad

Being an owner-builder comes with some fantastic perks. You get to choose the tradies you employ, the materials you use and determine the overall scope of building your dream home. So, whilst you might not be the one with the tools of the trade in your hands, you’re certainly the one in the driver’s seat when it comes to managing the build.
 
This can send shivers up the spines of financiers and lenders, as many of the banks steer clear of financing owner-builder loans simply due to the potential risks that may occur. Risks include delays with materials and suppliers, cost over-runs and budget blow-outs as well as an individual’s (lack of) experience in the game.
 
When it comes to financing a standard property purchase or a straightforward construction loan through a registered building company, there are many options to choose from and the banks will bend over backwards for your business. However, with owner-builder loans, the choices are limited. That said, there are still options out there so don’t get disheartened!
 
My suggestion is to talk to a broker that has experience financing owner-builder loans. They will be able to help you find the best lender and guide you through the finance process.
 
As brokers, it’s our responsibility to make your project and finance application as attractive as possible. Your initial prep work and planning is of paramount importance: you need to present your project in the best possible light. This means clearly articulating the vision, project and plan so that the bank feels completely comfortable with the idea of lending you the money required to complete your build.

  The finished product of one of our owner-builder client's home.

The finished product of one of our owner-builder client's home.

An important thing to note is the fact that the maximum Loan to Valuation ratio (LVR) for an owner-builder loan is 80%. Having said that, not all lenders will actually allow you to borrow 80%, and some will only allow you to borrow 50-70% of the property value for owner-builder loans.
 
In addition to this, for higher LVR, banks often want additional assurances. This means they may want to see that you have a further 20% of the entire build costs (not the land costs) in cash to assist with cost overruns that may occur during the build.
 
Banks will also want to get to know you a little better. They will want to see a summary (similar to a mini resume) about yourself and the key people you are employing to complete your owner-builder project.
 
If you have limited experience in the building game, you may need to mitigate that risk by highlighting to the bank that you are employing an experienced building project manager to oversee the job.
 
The banks will then want to see your building plans and an expenditure report that details the cost to build. It’s recommended that you appoint a building estimator to assist with this process as accounting for every nut, bolt, brick and tile can be a very tedious process if you have never built before. This report is then used by the bank and their Quantity Surveyor (QS) to determine the value of the project, so ensuring this step is completed faultlessly is crucial to the success of your application.
 
It is also recommended that you source as many quotes as you possibly can – as some banks, especially those lending to the higher LVR limit, want to see quotes in addition to the estimators report/costing schedule. Although this might seem tedious, the banks are lending you a lot of money so they want assurances that you have carried out your due diligence on the project. They want to know you have accounted for all costs and your estimates are realistic.
 
You will also need to provide the bank with a timeline for your build, often referred to as a timing schedule. This report details the timing of the build; the length it will take to plan and prepare your project, to complete the base stage and the framework, to get the house to lock up, to install the fixtures and fittings and, finally, when you expect things to be complete. Generally the banks like to see the project completed within 12-18 months of drawdown.
 
To secure pre-approval the bank will want to see your standard financials, pay slips and personal information along with the items noted above.
 
Once you have the tick of approval from the bank, you will need to provide the following:

  • Your owner builder permit certificate
  • Your approved plans
  • Your building permit
  • Soil Tests and Surveys
  • Copies of you insurances (builders all risk and public liability)
  • Copies of all quotes
  • Progress payment schedule

With the progress payment schedule the banks will each have a progression of the building and payment stages that they would like you to follow and will only release funds appropriate to the stage of the build that you are in.

Before the build commences the bank will also want to send out a Quantity Surveyor (QS) to confirm the costs of your construction and your project value.
 
With standard building loans, the banks traditionally send out a valuation firm to confirm the works have been completed before they release payments to the builders and a similar approach is adopted with Owner Builder loans.
 
With each stage, the bank will send out a QS to compile an updated report on the build progress and value to date. The bank will then release funds in response to the results of this report. This can be costly, so that’s something to keep in mind when budgeting for owner-builder projects.
 
If you’re interested in an owner-builder project, the first place to start is talking to the team at Home Base, Subiaco. Their staff will help keep you on the right track.
 
When it comes to finance, given owner-builder loans are so unique, it’s important to appoint an experienced broker.
 
If you live in Australia and have any finance questions, please get in touch with Urbanology Finance Group (hello@urbanology.net.au). We’re here to answer any of your questions and, best of all, our advice and our service is FREE!

Nadija Begovich
Finance Broker
URBANOLOGY Finance Group
ACL: 389320
Phone: 0417 903 990
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