All Topics / Help Needed! / Construction Loan – having problems with LVR

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  • Profile photo of jemmiejemmie
    Member
    @jemmie
    Join Date: 2008
    Post Count: 2

    Hi,

    I have been lurking for a while and finally have a need to post as I can't seem to find my answer when searching old posts.

    My husband and I bought a block of land recently and have just begun the process of building a house on it which will be our first investment property.

    We have our PPOR which we took out a LOC against. We used some of this as the deposit and fees when we purchased the land, taking out a loan for the remainder with another lender. Unfortunately this lender does not seem to be as helpful or forthcoming as our PPOR home loan lender. What we want to do is this:

    – Land at purchase was valued at $125000
    – Construction cost as per building contract will be $250000
    – Finishing costs will be approx $60000 but we will organise these separately from the builder after handover.
    Total cost is therefore $435000. We have a land loan of $100000 (the rest came from LOC) and want to borrow 80%LVR which would be an additional $248000. We will then use another $62000 from our LOC to make up the difference.

    Our problem is that the lender initially said they will only work our value as land+construction (as per building contract) meaning they are going off a value of $375000 to work our the LVR. This seems ludicrous as houses in the same street have recently sold for over $500000! When I asked if they will take finishing costs into consideration, they said they will only do so if we provide written quotes (which we can) AND if they control the funds. They have said that we therefore need to provide the $62000 deposit.

    Does this mean they actually want us to hand over the $62000 to them to hold until we need it for the finishing costs? This again seems crazy.

    Is this standard practice? I have read on here that some lenders use GRV when working out the LVR for construction loans. I'm really annoyed (but not surprised) that our lender did not point this out when we first approached them for the land (with pending construction) loan. I have just double checked our contract and we have to pay a 1% exit fee ($1000) if we leave now and already paid around $800 to set up the loan.

    Any clarification or advice on this issue would be hugely appreciated!

    Thanks in anticipation.

    Profile photo of ducksterduckster
    Participant
    @duckster
    Join Date: 2004
    Post Count: 1,674
    jemmie wrote:
    Hi,
     They have said that we therefore need to provide the $62000 deposit.

    Does this mean they actually want us to hand over the $62000 to them to hold until we need it for the finishing costs? This again seems crazy.

    Is this standard practice? I have read on here that some lenders use GRV when working out the LVR for construction loans. I'm really annoyed (but not surprised) that our lender did not point this out when we first approached them for the land (with pending construction) loan. I have just double checked our contract and we have to pay a 1% exit fee ($1000) if we leave now and already paid around $800 to set up the loan.

    Any clarification or advice on this issue would be hugely appreciated!

    Thanks in anticipation.

    I am not completely sure if this is what will happen so check /clarify with lender.

    The $62,000 would be handed over as progress payments to the builder as the lender normally asks for a deposit from you via  you paying the builder.
    So you pay the first couple of stages of construction up to $62,000 plus whatever other deposit was needed.
    Then you have to show the receipt to the bank at each stage and they check the work has been carried out.
    Once you reach the end of your contribution the invoices have to be given to the bank who then pay the builder for the next stage of construction that has been completed.

    Usually the valuation can use both methods but the lender usually goes with the valuation that gives a lower result.

    Profile photo of jemmiejemmie
    Member
    @jemmie
    Join Date: 2008
    Post Count: 2

    Ah ok, that makes more sense. I have contacted the lender to get clarification but unfortunately they are very slow in getting back to me…hopefully this will be their answer. Thanks :-)

    Profile photo of jsawtelljsawtell
    Participant
    @jsawtell
    Join Date: 2007
    Post Count: 57

    Hi, this is interesting as we are about to go through same process. It is becoming more common that people are finishing their houses outside of the building contract. Our Builder sales consultant even told us that we should do the Drive and a few other things ourselves as the builders price would be excessive (obviously sub contract work out + healthy margin). Some of the floor finishings we can get the top of the line for the same as builders entry level product price. As for the value, this should be common sense, but as mentioned in previous post, banks are looking for the lower value to cover themselves.

    We were also told that we needed to provide firm quotes for approval. I believe that this would be to ensure the money is being spent where you say it is, and not pocketed or spent on consumables. Like us, that is not the case, and would be nice to have some control over this. We have struggled to get a written quote for the driveway. The contractors I have spoken to don’t want to quote as they see it is a waste as the project is in 4-6 months when house is built, even after assuring them I would pay deposit and lock them in now.

    Good luck with it all

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 16,213

    What you would normally do is borrow up to 80% of the land value and 80% of the fixed price building contract. You could have got the builder to build some of those finishing costs into their contract.

    If the house is finished inside and you have the occupancy certificate then you can always increase the loan (if you service etc) up to 80% of the value and then get the funds that way.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    https://terryw.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://Terryw.com.au/

    Profile photo of fredo_4305fredo_4305
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    @fredo_4305
    Join Date: 2009
    Post Count: 336

    Is it an option to refinace as soon as you get the occupancy cert then do the remainding work yourself?

    Profile photo of BankerBanker
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    @banker
    Join Date: 2010
    Post Count: 371

    To clarify the banks position. Let’s assume you own land outright and want to spend 250k to build – borrow 200k (irrelivant if the land is worth 300k or $1.0M).

    You will need to put your 50k in first – either to the builder or into bank, so the bank knows between you and them there is 250k to complete construction. It is extremtly common for clients to get to the end of construction and be short of money. The banks will not generally let you start unless funds to complete are confirmed / locked in.

    It is not a position the banks want to be in where they have a customer with a half built house and no money left. Under responsible lending guidelines a bank cannot simply lend because your house is incomplete – you still néed to qualify for the loan if you need to go back for an increase.

    If you were out of money, half built, and no longer fit the banks policy – they would be forced to sell the property on you. Some of these policies make banks Seem unfair however they are also protecting the client from mistakes many other customers have made before them.

    The biggest problem the banks have is front end staff. Most policies the banks have are quite sound in logic – the problems is the front end staff don’t understand the reasoning behind policy and struggle to explain the reasons ( if they explain at all) to the clients…

    Profile photo of BankerBanker
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    @banker
    Join Date: 2010
    Post Count: 371

    Re lending on future value. I cannot count how many people have asked me to lend say 100% of a project because it will be worth more on completion. There are not too many business transactions outside of property either that allow you to take your profits, or offer them as security before you’ve made / earned them.

    Banks often revalue property on completion as part of standard policy – you can take your profits then.

    Profile photo of Scott No MatesScott No Mates
    Participant
    @scott-no-mates
    Join Date: 2005
    Post Count: 3,856
    Banker wrote:
    … I cannot count how many people have asked me to lend say 100% of a project because it will be worth more on completion. There are not too many business transactions outside of property either that allow you to take your profits, or offer them as security before you've made / earned them…

    And some people think banks are stupid, tight or use low valuations – it is a measure of risk management.

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