So you are looking to build a home for yourself? The idea in itself is so heartening; leave alone the satisfaction of executing it.
I must assert in a quick breath that while executing the plan, your budget, your borrowing capacity, and the various developmental costs are all important factors that you should not ignore.
While passing a loan to you, the lenders not only look at the expected profitability of your project but your creditworthiness just as well. Usually they offer in the range of 70% to 80% (the Loan to Value Ratio) of the development cost.
This implies that you have to be good enough to manage the remaining 20% or 30%, as the case may arise. As a general rule, you can mop up a higher contribution from the lenders for the residential projects.
The various phases of development finance
When lenders pay for a development project, they do so in certain pre-stipulated phases. They make the first payment under the tag “deposit” and then move on to the base stage, frame stage and lock up stage.
If everything goes right (and their interest in your project does not flag), they pay for the fixing stage and pass on the remaining money to you on the completion of your development.
An important aspect of development finance
Your mortgage amount coughs up some interest for sure but you do not need to pay it in the construction phase. Naturally, this provides greater liquidity to you and subsequently you can tackle any contingency more flexibly.
On the other hand, the interest amount keeps adding up and from the second month onward you not only pay interest on the mortgage amount but you also pay interest on the interest accumulating on the principal amount.
You can infer that it is only too important to be well-informed about the “interest” tactic employed by the lender.
You can refinance your finished project
You can try a couple of things. You can choose to sell off your finished project or retain it for future sale. If you opt for the latter, you may have to get your development loan refinanced under different terms. This will help you in clearing the development phase mortgage. The refinancing comes under the head “Investment Loan”.
Smart loan application translates into generous LVR
If you want to get going with your dream building project, make sure that you have a powerful application to take you through the initial hurdle.A strong application holds you better in terms of LVR.
Any lender with a sound mind does not mind investing more if he is certain of the viability of a project and the profit that it can siphon for him.
The application should focus on points that include, but are not limited to, site development, feasibility study, timelines, projected sale figures and zoning.
Private lenders have come to the fore
Today, you can also avail offerings from private lenders if you find the negotiations with the banks falling flat. For all you know, some of the really unconventional private lenders might find your project really interesting (in case your project sounds very different or impractical to the banks).
Lenders conduct their Due Diligence
Those who lend money are a no-nonsense breed of people (speaking strictly financially). They conduct their Due Diligence and find out how secure your project is. They also find out if the security you have offered holds adequate strength. A few things they unfailingly look for:
- If the size of your apartment is less than 45 square metres, the lenders are not pleased.
- Does your land fall in the residentially zoned area or is tagged under “rural properties”? The former really arrests the attention of lenders.
- If your dwelling’s end value beats the median house price in your area, the lenders feel a little discomfited.
- They chew for long on the first sale price of the security. After all, in case of payment default, this amount determines what they can extract out of your project, being its mortgagee.
Being adequately informed about the lending process is important
If you have taken the first step towards your home building project, do not fall short of executing the plan fully. Being informed about a lender’s take on development projects may give you a distinct advantage and will make property negotiations a lot easier.