- Hey, it's Connie from Prosperity Finance,
sharing the best financial tips
so that you can be more successful
with achieving your financial goals.
In the previous session I shared with you,
there are three types of building a property.
In today's session I'm going to explain
the difference between building a new property
versus buying existing property,
what is the difference in terms of finance requirements.
So let's begin.
Firstly let's look at the borrowing capacity
or the loan amount.
So when you decide to build a new property,
you'll probably get very similar amount approval
compared to purchase a new loan,
purchase, sorry, purchase a new property.
The reason being is when you do the construction,
the bank actually consider the end position.
So once the construction complete,
how many bedroom do you have?
Can you still have two flatmates living with you, right?
So if you purchase a three bedroom
and you built three bedroom,
both give you the potential
to have a two boarder income.
So there's no difference.
That's why they are very similar
in terms of your borrowing capacity.
However, some banks will allocate 10%
on top of your building contract
just to cover, you know, cost overrun.
This is also applicable to a fixed price contract.
You probably wondering why, you know,
if it's a fixed then why is cost overrun.
Well, is the builder responsible for any cost overrun?
Only if they deliver what it says in the contract.
However, if you said I want to upgrade my bathroom,
then you actually, you know, want something
outside the contract.
Therefore, additional cost won't be able
to pass to the builder.
So the bank have to allocate,
allow those kind of cost overrun.
But it's not the same for all the banks.
Some just look at the contract itself,
they don't add anything.
Some will allocate 10%.
So if your max borrowing capacity
is exactly the amount you need to borrow,
then it could be a difference.
Some bank will lower your borrowing capacity
whereas buying a new home,
they don't have to worry about cost overrun.
So I will say loan amount would be very similar
and may not the same.
But by choosing the right lender,
we can overcome that issue.
Now the rest of them are actually
the additional criteria that not applicable
to purchasing existing property.
So what are they?
Contract.
Builder, what kind of builder you engage.
And registered valuation.
Okay so let's have a look at them.
So contract, normally bank is happy with
two main type of contract.
One is called turnkey contract.
Turnkey, it meaning is give you the key,
you can just turn that and then go into your house, right?
So that means give you everything
you need for your house, okay?
You just move in, that's it.
Another type is called fixed-price contract.
Now some fixed-price contract doesn't include
small things like letterbox or landscaping
as it's still livable but it's now everything, okay.
So be careful when you sign that fixed-contract,
you know what's not in there, okay.
Other contract the bank may not happy with,
for example, if you are responsible for the material
and let the builder engage, like, plumber and electrician,
you know, carpenter, et cetera.
The total cost can blowout.
So the bank actually not very comfortable
with that kind of a contract.
So, just so you're aware.
In terms of builder, some bank must have a master builder.
Obviously master builder is the highest qualification.
It's also, you know, there's a quality assurance.
But, lot of small builders,
they are not master builders,
they are licensed builder.
So some banks happy with licensed builder,
doesn't have to master, different requirements, okay.
Finally is a registered valuation.
Well the registered valuation is required
because bank has no reference to the value of the property.
Unlike existing property, bank can go into their system
and see what is the estimate value of this property
so I can work out my LVR based on that value.
So most of the time you wouldn't need a valuation
when you buy existing property.
However with a construction,
obviously they need to establish a value.
So they normally have two values.
One is as if complete.
So, as if the construction has completed,
what is a market value, okay?
And the second value is as is.
So as is normally means what is the current value is?
You know, depends on the progress.
So if you just started then it's just a land value.
But if you already make some progress
at the constructing stage
then it's valued up, right, progressively.
So, valuation, every bank has
a different requirement for that.
Some banks can waive it if you have a master builder
or LVR's within a certain percentage
or if the builder is master builder,
et cetera, they're all different, right.
So it's very hard to navigate by yourself to be honest.
So, when we look at a construction loan,
we actually look at everything, okay.
So it's definitely more complex than just the finance
for a new property, sorry, financing existing property.
But I guess, you know,
as it's still worthwhile considering construction
'cause as I mentioned in the last session,
it give you lot of customization
and probably save you a lot of cost
compared to buying existing one.
So I hope this useful.
Obviously when you have this building requirements,
it's all case-by-case, there's a lot of things to consider.
So the best way is just to give us a call
and we will guide you through.
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