How to finance a new townhouse that’s sold with a split contract
Townhouses are an increasingly popular option for Australians who live in our major cities, because they tend to be larger than apartments yet cheaper than houses.
To cater for this growing demand, an increasing number of developers are doing townhouse projects.
A lot of developers are now going down the path of issuing two separate contracts for the land purchase and building phases, which is known as a ‘split contract’.
If you want to buy a townhouse that’s being sold through a split contract, you need to present your mortgage application to the lender and valuer in a really specific way – which a lot of brokers don’t know how to do. But at Mortgage Domayne, we follow a structured process to ensure your application gets presented correctly and is likely to be approved.
That not only makes for a faster, smoother process; it also means your application doesn’t need to be sent to multiple lenders (which can affect your credit score).
Five ways buyers benefit from split contracts
Developers benefit from split contracts, because they reduce their holding costs. (Because instead of getting paid only at the end of the process, developers receive a payment when they sell land to the buyer and then receive five progress payments during the five stages of the build.)
But buyers also benefit from split contracts, in a range of ways.
First, developers pass on their lower holding costs to buyers in the form of a cheaper sale price.
Second, buyers pay lower stamp duty – because instead of being charged stamp duty on an entire project (land plus build), they are charged stamp duty only on the land.
Third, with a standard one-part contract, the valuation is done once the build is complete (which might be a couple of years after the deposit is paid). But with a split contract, the valuation is done upfront, before construction. That provides buyers with greater certainty when they apply for finance.
Fourth, while townhouses built with one-part contracts tend to have shared slabs and shared walls, those built with split contracts tend to have standalone slabs and walls.
Fifth, townhouses built with split contracts are less likely to be part of a strata complex, which means lower ongoing costs for buyers.
Why it’s important to work with an experienced broker
Some split contracts specify only the end value of the townhouse (e.g. $550,000).
But if you want the lender to approve your loan application and give you progress payments during the build, the split contract needs to specify the end value (e.g. $550,000) … and the land value (e.g. $300,000) and the build value (e.g. $250,000).
These kinds of split contracts meet the criteria laid down by the Australian Property Institute (an industry association for property professionals). As a result, lenders are willing to provide loans for new townhouses that are sold through these kinds of split contracts.
An experienced broker, like Mortgage Domayne, will be able to spot the difference between the good type of split contract and the bad. Also, an experienced broker will provide supporting documentation to the valuer, so the valuer realises that although the townhouse is part of a larger development project, it’s being built as a standalone home.
That’s why Mortgage Domayne has a strong track record of helping clients qualify for loans to buy new townhouses.
Want to buy a new townhouse? Mortgage Domayne can guide you every step of the way. To discuss your options, call us on 1300 366 296 or book an appointment.