Finance advice
Otto Dargan

Why construction loans just don't work

By Otto Dargan

Why is it that everything seems to go wrong when you build a property? What can you do to prevent the headaches?

Blogger: Otto Dargan, director, homeloanexperts.com.au 

Every bank manager and mortgage broker knows it. Construction loans are a pain in the neck! 

Long after a loan has settled the file still seems to be sitting on our desks and in some cases the loan needs to be amended several times before the job is done. Ultimately that means stress and headaches for you as the borrower.

It doesn’t have to be this way! You just have to set it up properly at the beginning.

Some industries are simply broken
Have you called Telstra, Optus or Vodaphone recently? Didn’t have a great experience? Don’t blame them. Their industry is broken.

So is mine. I’d like to apologise on behalf of the finance industry. It’s a bit of a mess down here. And in case you haven’t noticed the building industry is in the same boat.

Now imagine trying to get two broken industries to work together. This is the source of the problem. Both construction and finance are very regulated and bureaucratic industries and the weird rules that they each have simply don’t work with the other’s requirements.

What always goes wrong
What can you expect when you decide to build? The most common issues we see are:

1.    Variations: Changing the building contract during construction may require the bank to reapprove the loan (approx. 4 week delay).

2.    Communication: The bank not telling the builder when they need a document or form. (approx. 1 week delay).

3.    Loan structure: The mortgage broker not setting the loan up as a separate land loan and construction loan (approx. 4 week delay).

4.    Running out of money: The borrower running out of money during construction. Typically due to poor planning or variations (can sink the entire project).

5.    Cost plus contract / owner builder: The budget almost always blows out well beyond the borrowers expectations (can sink the entire project).

Let’s talk solutions
If you follow some simple rules then you can avoid most of these issues!

1.    Don’t change the contract during construction unless you can pay for it out of your own money.
2.    Keep following up your bank until they release the required funds to the builder.
3.    If you are buying land and building then you should have two loans not one. If your mortgage broker sets up your loan as one loan account then ask them why.
4.    Don’t run out of money! The bank will not come to your rescue if you don’t have the equity or income to support a larger loan.
5.    Cost plus & owner builder construction are for experienced investors only. If you don’t know your stuff then just hire a contract builder.

Of course the best solution is to use a mortgage broker that knows what they are doing! And choose your builder carefully.

Great expectations
Expect to have some headaches and delays during the construction process. It’s just the way it is.
As a mortgage broker we will do all that we can to prevent these problems; however ultimately we can’t stop the banks from making mistakes. We’ll just help you to fix the problems as they arise.

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About the Blogger

Otto Dargan

Otto Dargan

Otto Dargan is a two-time winner of St George Bank's 'Australia’s Brightest Broker' competition and the managing director of specialist mortgage broker homeloanexperts.com.au

Email:
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  string(72) "Mortgages in a tighter lending economy and why Brisbane is a good option"
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Tune in to the latest episode of Property Showcase, the podcast with the inside track on the products and businesses that will help turbocharge your portfolio, maximise returns and make your overall investment experience seamless and stress-free!

" ["fulltext"]=> string(818) "

To hear more about these services, make sure to tune in to this episode of Property Showcase!

 Make sure you never miss an episode by subscribing to us now on iTunes!

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Son Pham is the accredited Head of Mortgages at Rethink Financing\/Rethink Investing. He has over 6 years\u2019 experience writing loans, over 12 years in the wealth management industry working for the likes of CBA, AMP and private practice and he is also a licenced financial planner (AFSL 326450). He has multiple investment properties that are cash flow positive which help pay his mortgage on his home and fund his lifestyle.<\/p>\r\n

Son is able to write all types of residential and commercial property loans.<\/p>\r\n

In this episode of Property Showcase, head of mortgages at Rethink investing Son Pham joins host Tim Neary to unpack how an investor should approach getting a mortgage in place with banks tightening down on serviceability.<\/p>\r\n

Hear from\u00a0Son\u00a0about:\u00a0<\/p>\r\n

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  • The pitfalls that he has seen people get into<\/li>\r\n
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    Whether it\u2019s building a successful property portfolio or investing in one of their Development Funds, Open Corp can help you through every stage of your investment journey. The team has 40 property specialists who collectively have been involved in over $4 billion worth of property transactions and the acquisition of more than 8000 homes and investment properties.<\/p>\r\n

    In this episode of Property Showcase, director of investment services for Open Corp Michael Beresford,\u00a0joins\u00a0editor of Real Estate, Tim Neary to share why he disagrees that the cooling market means that the best times are behind us.<\/p>\r\n

    In this episode, hear from\u00a0Michael\u00a0about:\u00a0<\/p>\r\n

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    • Why Brisbane is a good investment option right now<\/li>\r\n
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Mortgages in a tighter lending economy and why Brisbane is a good option
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Will Magee has had ambitions to enter into the Australian property market for quite some time, but it has been more than just finances holding him back.  Having been granted permanent residency just two weeks ago, Will is wasting no time and is now in the process of signing papers and finding his first investment property.

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In this episode of the Smart Property Investment Show, Will joins host Phil Tarrant to share why he is purchasing his first property in partnership with his brother, discuss the complications that can arise from such a strategy, and unpack the ongoing plan for building a joint property portfolio with his brother.

Will will also share how they approached saving for their first property, why he is taking out the mortgage in his name exclusively, and share their savings plan for the year ahead.

If you like this episode, show your support by rating us or leaving a review on iTunes (The Smart Property Investment Show) and by following Smart Property Investment on social media: FacebookTwitter and LinkedIn.

If you have any questions about what you heard today, any topics of interest you have in mind, or if you’d like to lend your voice to the show, email [email protected] for more insights!

RELATED AREAS OF INTEREST:

From property in Australia to a ski lodge in Japan
Mortgage Trusts, an alternative first step for property investors
Should a real estate title be in one person’s name only?

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A property investment plan years in the making
object(stdClass)#1203 (52) {
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  ["title"]=>
  string(75) "Regional Victoria showing up Melbourne in price performance, new data finds"
  ["alias"]=>
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  ["introtext"]=>
  string(139) "

Median house prices in regional Victoria outperformed that of Melbourne in the June quarter, the latest REIV figures reveal. 

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Median house prices in the regions rose 4.0 per cent to $419,500 but in Melbourne they dipped by 0.6 of a percentage point to $840,000.

The result in Melbourne was due to a 0.8 of a percentage point fall in prices achieved at auction; this was despite a lift of 2.3 per cent in private sales.

Inner Melbourne suffered due to auction prices, where median prices fell by 4.9 per cent to $1,459,000 but it was middle Melbourne that was hardest hit, with a 5.4 per cent drop to $974,500.

Outer Melbourne had a good quarter with the median rising by 0.5 of a percentage point to $681,000.

Apartment prices in regional Victoria grew by 3.7 per cent to $304,500 while the metro media was up by 0.5 of a percentage point to $604,000.

REIV President Richard Simpson said that despite fewer sales, many sectors of the market were performing well.

“2017 was a bumper year and while the trendline has flattened, despite the fall in median house prices in the June quarter, median prices are still up this calendar year for both houses and units, in Melbourne and in the regions,” Mr Simpson said. 

In particular there was been strong growth in regional centres which is probably due to the first-home buyers’ concessions said Mr Simpsons.

“The first-home buyers’ concession has been a boon for regional areas. A new entrant to the property market buying a house at the regional median will pay no stamp duty, while a first home buyer of an apartment in Melbourne at the median price would pay stamp duty of nearly $25,000,” he said.

Mr Simpson said that more prospective buyers are looking towards regional Victoria which is also having an effect in Melbourne.

“Melbourne’s outer perimeter continues to grow. Small increases in the June quarter mean that the median prices for both houses and units have risen over 10.5 per cent from a year ago.

Mr Simpson said moving forward that vendors need more realistic expectations as the highs of 2017 are now over.

“Negative chatter about the future of the sector coupled with stronger lending controls by financial institutions has created some uncertainty and vendors need to be realistic with their price expectations,” Mr Simpson said.

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Regional Victoria showing up Melbourne in price performance, new data finds

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