Property owners can improve the value and features of their property by either rebuilding the house, building additions, or renovating the existing house/unit. Lenders have different policies depending on the extent of the construction or renovation being undertaken.

Renovations that are non structural and don’t require council or certifier approval are easier to fund as the lender will typically provide the borrower with up to $100k to pay the various trades directly as invoices become due. Larger amounts are possible but some lenders will ask for copies of trade quotes to substantiate the purpose of the funds.

At the other end of the property improvement spectrum is a full knock down and rebuild. Lenders that do construction loans will require documents to evidence council approval and a fixed price builder contract along with any supplementary trade quotes not included in the primary builder contract. The lender will lend based on the future value of the property being calculated as the current value plus the build contract and quotes. The new house may well be worth more than the build costs and that is often the whole point of the rebuild to create equity but construction loan lenders typically take a more conservative approach. The main risk is the selection of a builder that can complete the construction for the fixed contract price without significant variation claims. The lender will pay the builder in accordance with the progress claim schedule in the build contract. If the builder stops the construction for any reason, the lender will cease making progress payments. Other difficulties can arise when the property owner strays from the original plans and quotes with selection of more expensive build materials. This is known as over capitalisation and can result in building costs being greater than the future value of the property and negative equity and making it impossible to refinance at completion.

House additions like extensions, 2nd stories, and granny flats generally require council or certifier approval and are treated as construction loans by most lenders. Depending on the size of loan and lender policy, the funds may be released to the owner to pay individual invoices or paid by the lender to the primary builder in accordance with a fixed price contract progress claim schedule.

If you would like to discuss finance for your home improvement ideas, or any other related issue like council approvals and assistance with builder due diligence, please do not hesitate to contact us.