Construction Loans for Owner Builders - Navigating the complex rules

As many borrowers may have known, construction loans for owner builders are not broadly welcomed by Australian lenders. While regular construction loans have its own challenges already, construction loans for owner builders would be even more complicated. This article will give some insights on why it is and how we navigate these strict rules to help you get a construction loan for owner builders.

Who are owner builders?

The definition of an owner builder varies among different lenders. In general, the following definition of an owner builder applies to all lenders.

  • Property owners who manage their own residential building project or owner builder project.
  • Property owners who carry out a portion of the construction project.
  • Property owners who are also Directors or Proprietors of the entity undertaking the building project (unless the entity is a Pty Ltd company and has a standard fixed price building contract in place between the Pty Ltd company as the builder and the individual as the customer.)

For the last point mentioned above, where the owner may also be the director of a Pty Ltd company taking the building project, lenders have different views on it. Some banks DO NOT regard these borrowers as owner builders, and therefore regular construction loan rules apply. But some lenders treat them as owner builders as long as they hold the building license and/or have a financial interest (excluding PAYG employees) in the company that will carry out the construction.

Will banks lend to owner builders?

A majority of the Australian lenders DO NOT accept owner builders and in turn do not have owner builder loans or a specific type of loans to support this use case. However, there are a couple of lenders (even a couple of Big Four banks) who have home loans available for owner builders to help them achieve their plans of building their dream home. Among these, some lenders accept owner builders wholeheartedly, while others reluctantly accept owner builders and put in place very strict rules. Those rules may include prior building experiences and additional buffer funds (with a budget) or having a licensed builder supervise.

What is so special of owner builder construction loans?

Not all lenders are born to be discriminative to owner builder loans. Many lenders did welcome owner builder construction loans for many years before pulling out of this space. Part of the reason is that there is a higher chance that owners will frequently change their building plans. Additionally, owner builders are potentially more susceptible to cost overruns, or even not completing the construction! This presents a higher risk to the banks and lenders comparative to other types of customers who may apply for loans with them. Only those who are self licensed builders are still seen favourably overall.

What documents are needed to get an owner builder construction loan?

In the article How Do Construction Loans Work, we have listed detailed documents that lenders will ask for a construction loan. For an owner builder construction loan, extra documents as follows may be required (for pre-approval or your loan application):

  • Evidence of sufficient funds, and an additional buffer of 15% to 20% may be a recommended or compulsory requirement among different lenders.
  • A completed Owner Builder Independent Advisers report including written evidence from a recognised local building advisory service / architect / quantity surveyor / independent licensed building inspector that the cost benefit of the customer completing the project on an owner-builder basis has been verified and is satisfactory.
  • The total cost of construction to complete the owner builder project.
  • Valuers may request additional documentation to support the ‘as if complete’ valuation. This may include:
    • Engineer’s details re slab/footings
    • Engineer’s Certificate re slab/footings
    • Pest treatment or pest prevention confirmation
    • Roof truss details from manufacturer

In all cases, both mortgage brokers and lenders will need to know the borrower’s experience and background to carry out the construction project. Notes of the background will always be required in the loan submission to support the application.

What’s the maximum LVR for an Owner Builder Loan?

Due to the substantially higher risks of an owner builder loan, even for those who are willing to lend money to owner builders, these lenders will only allow a maximum loan to value ratio (LVR) of 60%. We have seen lenders only allowing 50% LVR. LVR will be calculated as the ratio of loan amount to value of the block of land and the cost of construction . Please be noted, Licensed Builders (with applications to lenders who do not classify them as owner builders) may be allowed to get a maximum LVR of 80% with fixed price building contracts in place.

However, if you have enough equity in your existing land (or even other properties), a refinance with cash out for funding the construction loan is always a desirable option.

In other cases, a family guarantee may be possible to grant you an 100% LVR loan (entire loan amount). For more information about family guarantee, please refer to the Family Guarantee page for more details.

How will lenders fund the construction costs?

Similar to regular construction home loans, lenders will not fund in advance of the work being finished. For owner builder construction loans, funds are released against the cost to complete and stages of construction as advised by the lender’s valuer. Funds drawdown is based on the items being affixed to the site. For example, when the borrower wishes to purchase the bricks to construct the walls, lenders will only release funds after the bricks are affixed in place.

During the construction process, any variation to the estimated cost may need to be covered by the borrowers. Making sure to have a safe buffer financially (and a good budget in place) is crucial in these loans.

How loan repayments will be made for owner builder construction loans?

When a certain stage has been finished by you or your contractors, you then need to send the invoice to your lender for reimbursement by yourself or your mortgage broker. Once the lender starts to draw down payments (progress payments), you will then need to pay the interests on the amount of money that your lender has drawn down. During the construction period, the repayment type will always be Interest Only. This is regardless of the type of construction loan repayment you selected (ie Principal and Interest repayment or Interest Only repayment in a longer term).

Similar to regular construction loans, after the final payment is made (your house is complete), your construction interest only period expires. If your construction period ends before the end of your approved interest only period, then your loan will be converted into Principal and Interest repayment automatically.

A review of the loan product with your lender directly or your mortgage broker is recommended in order to avoid any changes that are not in your best interest.

Looking for a specialist to help you with an owner builder loan?

At Reservoir Finance, we want to help support Australians to achieve their financial goals and dreams. Building your own home is something that is very personal and close to heart. We understand this.

We also understand the complex policies that lenders and banks have surrounding construction loans, especially for owner builder. We are your perfect partners to help navigate the financial complexities.

Reservoir Finance is an independent mortgage broker (not owned by a bank or lender) based in Sydney, but servicing all Australians everywhere. We always put our customers’ needs first, and one of the ways we do this is to not charge upfront fees for our service, initial advice or consultation! In fact, 99% of our clients have not been charged upfront fees by us.

We would love to be your partners on your journey to building a dream home or your next big project. Contact us using the form below, call us (02 8288 9123) , visit us or even book an online meeting with us! Let us be your partners in achieving your financial goals.


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