Home Loan for Owner Builders
Some homebuyers are set to construct their own homes. It’s a better sense of accomplishment for some to take control of the entire building process and see the property come to life as they go.
Owner-builder home loans provide that pathway for individuals to be the main person overseeing the home construction. Owner builders take responsibility for project management, coordinating trades, and ensuring government and council regulations are met.
This article talks about owner-builder home loans, how they work, what key information you should know, and which lenders offer this type of home loan product.
What is an owner-builder home loan?
An owner-builder home loan is a type of loan that caters to individuals who plan to build their own home rather than purchase an already established structure.
Owner builder loan is structured differently from a traditional mortgage because it allows you to progressively draw money from the loan to meet the costs at every construction phase, while paying only the interest on the principal amount borrowed. These installment payments are called “progressive drawdowns.”
As the construction moves forward, the builder sends a detailed invoice which must be forwarded to the bank or broker. After being verified, the lender then releases the funds to pay for the costs on that phase of the project.
In an owner-builder home loan, you pay interest against the money drawn. For instance, if you’ve drawn $120,000 on a $400,000 loan, interest is only calculated on that drawn-down amount. And once the construction is complete, you’ll move from interest-only to both the principal and interest repayments according to the loan term (e.g., 25 years) set with the bank.
What are the progressive drawdowns?
There are key milestones in an owner build construction process. These phases include:
Groundworks: This is the first stage of the construction process where foundation is measured, poured, and given time to cure. The builders will also set up plumbing and drainage during this time. Expect different timelines and costs if the property is on a slope, or has unexpected foundational issues. The drawdown at this stage is about 15%-20%.
Framing: With the slab foundation laid, next is to construct the home’s skeleton. Single story properties usually take just a day, while two storey homes may take a few days to finish. Drawdown during framing is around 20% of the total owner builder loan.
Lockup: Next to framing is lock-up, which involves putting up walls, doors, windows, and roofing that essentially “locks up” the home nice and secure. This stage costs uses about 20% of the home loan.
Fit Out: The fit out stage is when the builder installs the internal fixtures needed, such as lighting and plumbing, and storage like cupboards. Drawdown costs will be approximately 30%.
Finishing: In the finishing stage, all the unfinished work on electrical, plumbing, and detailing will be completed. The property should be presentable and cleaned at this time. Drawdown from the loan will be at around 10%.
Owner builder home loans give you control over the release of funds and minimize the risk of disbursing a large amount of money at the start of the project. The arrangement makes it easier to stay on track of the expenses, shoulder only the interest during the build, and finish the project on time with proper financing.
How much can I borrow?
The maximum loan-to-value ratio for an owner builder home loan with full doc is 80%. Only two lenders in Australia offer the product at this arrangement. Most lenders accept 50%-70% LVR for owner builder home loans.
As you reach each construction stage, you submit a payment request to the lender, along with supporting documentation such as invoices, receipts, and progress reports. Documentation is extremely important because it demonstrates that the work has been completed satisfactorily and in accordance with build code and council regulations.
Should I choose to owner build?
One of the major benefits of owner-builder construction loans compared to traditional home loans is the ability to pay interest-only payments only on the funds utilized. During the construction period, owner-builder loans also offer the option of interest-only repayments, which can later switch to a standard principal and interest (P&I) loan after the construction is completed.
Savings are another advantage of being an owner-builder. By taking on the role of an owner-builder, you can save on costs. For example, you can subtract the builder’s margin of 10-15% for materials and 20-30% from tradies’ labor. On average, being an owner-builder can save you as much as 15-20% in total costs compared to hiring a traditional builder.
Being an owner-builder provides you with more control over the home project. You have the freedom to change the plans or customize certain parts of the renovation or building project according to your preferences. This level of control allows you to create a home that truly suits your needs and vision.
However, it’s important to note that the success of your owner-builder career will depend on your skill and experience.
Taking on the responsibility of managing the construction process requires knowledge and expertise in areas such as project management, trade coordination, and compliance with building regulations. It’s crucial to be well-prepared, have a solid understanding of the construction process, and be ready to handle the challenges that may arise. Ultimately, if you have no experience or interest in construction, it’s probably best to hire a construction professional and opt for a regular construction loan.
Call us for owner-builder home loans
With Intellichoice, you can carefully consider the benefits and challenges and your own capabilities about being an owner builder. Consulting with our owner-builder specialists and experienced tradespeople can provide valuable guidance and support throughout the project. Remember, the more prepared you are, the greater your chances of a successful owner-builder project. Get in touch with our team at any time!
