Home Loan Finance for a Construction Loan is Complex

Many people think that finding the right property at the right price is the most difficult part of the process to property ownership. In fact, it’s securing the finance you need to buy the right property at the right price!

Previously, I wrote about a first home buyer on a single income, who changed mortgage brokers to get a better deal on her home loan [Single Income Family In Need of a First Home Loan?]. In that scenario, the applicant’s lender didn’t change — the broker did.

Construction loan, complicated applicants

Construction loan are more complex than straight out property purchase loans because they often involve part payments and different stages of the build, but it can get even more complicated by the loan applicants and their circumstances.

Tania and her husband Craig* sought a construction loan to build a second storey on Tania’s parents’ property, where Tania and Craig will live. Tania has just returned to work three days a week, after giving birth to the couple’s first child, and her parents will assist with childcare.

The couple also own an investment property, which generates positive rental income that covers the mortgage (yes, it is possible); and have a substantial amount of savings. The property owned by Tania’s parents is completely unencumbered, with no mortgages, restrictive covenants or leases.

5% property title is a stumbling block

However, neither Tania nor Craig were on the title of her parents’ property, which is necessary in order to get a construction loan, without her parents also becoming applicants. She and Craig spent considerable time and money adding themselves to the title, for a 5 percent share in the property.

For all the major lenders, Tania and Craig’s 5 percent share in her parents’ property was too little to approve a construction loan against — they typically require a minimum of 20 percent ownership, or for the majority owner (Tania’s parents) to become applicants to the loan.

Tania and Craig’s broker found one lender willing to waive the 20 percent title ownership, providing Tania’s parents went guarantor on the loan — UniBank, a member-owned mutual bank for the secondary education sector. UniBank’s one other requirement is that the applicants have university degrees, which in this case Tania and Craig did.

After being formally approved for a construction loan through UniBank, Tania and Craig began construction on the second storey of the family home.

You need a good broker

Few brokers would try so relentlessly to find a lender willing to overlook their low shareholding in the property for which they were seeking the loan. This highlights the importance not just of checking smaller lenders — especially member-owned lenders — but also have a good broker to help you.

Learn more about home loan mortgages and find out what is possible.

* Not their real names