If elected, the Coalition has announced this week plans to reform prudential settings, including adjusting serviceability requirements for home borrowers, if elected this year.
In making the announcement the shadow assistant treasurer revealed that the Coalition was “ looking closely” at whether the serviceability buffer (currently 3 per cent buffer) is “appropriate”, the suggestion being that the buffer could be lowered which would increase borrowing capacity.
I’m sure more promises will be made relating to housing affordability and lender policies by both sides of politics in the lead up to the next election, but what get’s promised and what get’s delivered are generally two very different things.
In this week’s newsletter, we look at the differences between using existing home equity and a construction loan when purchasing a new build home.
When financing the construction of a new home, borrowers typically choose between using existing home equity or taking out a construction loan. While both options provide access to funds, they differ in structure, repayment terms, and eligibility requirements.
Using Home Equity
If you already own a property with significant equity (the difference between your home’s value and the remaining mortgage), you can access this equity to fund construction.
This is done by refinancing the existing mortgage to increase the loan amount, or setting up a separate loan using your existing property as collateral.
Advantages:
✔ Simpler process – No progress payments or staged drawdowns.
✔ Flexibility – Funds can be used for materials, labor, or additional costs.
✔ Lower fees – No need for lender inspections at each stage of construction.
Disadvantages:
✖ Limited to equity – If your home’s equity is low, borrowing power is restricted.
Construction Loan
A construction loan is specifically designed to finance home building, with funds released in stages as the construction progresses (slab, frame, lock-up, fit-out, and completion). Lenders require inspections at each stage before approving the next payment.
Advantages:
✔ Interest-only payments during construction, helping manage cash flow.
✔ Controlled disbursement – Prevents overspending by ensuring funds are used for construction.
✔ Higher borrowing potential – Lenders assess the value of the completed home.
Disadvantages:
✖ More paperwork – Requires building contracts, council approvals, and lender inspections.
✖ Strict conditions – Funds can only be used for approved construction costs.
Which Option is Right for Your Client?
If your client has significant home equity and want a simpler process, leveraging their equity might be the best choice. However, if they need structured financing with staged payments, a construction loan provides a tailored approach for building a home.
If you have a client wth an existing property, put them in touch with us to talk about the best option for them.
Variable
The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR.
1 Year Fixed
The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR. At the end of the three year fixed period, the borrowers interest rate will revert to a standard variable rate for the life of the loan.
