Building When You Already Own a Property

by Carlisle Homes

Planning a new build with an existing mortgage? Here’s how you could finance your house and land package.

Building a new home is a great way to get your foot on the property ladder. However, not everyone starts with their dream home. One common approach is to buy an affordable unit first to amass some equity. As your family expands and you need more space, you can use that equity to build the home of your dreams. 

But how do you get the finance for both a house, and land? A house and land package is an exciting way to design the perfect home for your family’s needs.

At Carlisle, we pride ourselves on our competitive building timelines, however, it’s still important to understand that all good things take time. A brand-new house can take around 5 months from start to finish, which means you’ll need to be able to finance the new build while still paying your existing mortgage.

While a second mortgage or refinance are possible ways to finance your house and land package, you’re probably better off with a bridging loan. Here’s why.

Second mortgage

A second mortgage is an additional loan taken out against your existing property. For example, you originally bought a unit for $400,000 with a mortgage of $300,000. Some years later, that unit is now worth $500,000 and the mortgage owing is $200,000. Your equity is $200,000. You apply for a second mortgage of $200,000 with another lender.

There are several barriers to this plan. The first is that lenders are usually reluctant to give you a second mortgage, because it is high risk for them. You’ll also need permission from your existing lender to get a second mortgage elsewhere, and an approval fee will be required.

Refinance

You may instead be able to refinance your property and increase your original loan. However, this means you’ll be paying double the repayments, or even more, which can put a strain on your budget.

It’s also unlikely that you’ll have enough equity in your first home to cover the entire loan needed for the second one unless you’re downsizing.

Bridging Loans

A more realistic approach may be a bridging loan. This is an additional loan that you take out during the ‘bridging period’ between when you sign the contract for the new house and land, and when you sell your existing home. Once your first home is sold, the bridging finance usually converts to a more standard home loan.

Most lenders will extend bridging finance to eligible borrowers for:

• 6 months if buying an existing home
• 12 months if building a new home

Bridging loans have advantages and disadvantages, so check with your mortgage broker to see if they’re right for you.

Some loan structures will allow you to defer repayments on the bridging finance until after the bridging period. That means that you’ll only have to make payments on one mortgage at a time. During the bridging period, the interest payable on the bridging loan is added to the balance of your mortgage. Once the first home is sold, you’ll start making repayments on the new principal, which will be a little higher due to the added interest.

Here’s an example of how that works.

You owe $200,000 on your existing unit. You’re building a new house as part of a house and land package, which is costing you $500,000. Altogether, you need to carry a debt of $700,000 while your new house is being built and before you sell the old one.

The monthly interest (at 4.3%) on this debt is $2,500. Annual interest is $30,000.

If you choose to capitalise the interest (have the interest added to the total balance owing), at the end of 12 months you will have a balance of $730,000. You then sell your original home for $400,000 and pay that amount off the loan. Your new mortgage is $330,000.

Know your timelines

Before you seek finance for a house and land package, make sure you understand the timelines involved. Bridging loans come with a strict end point. For a new build, they usually allow 12 months. After that, the lender may have certain rights, for example to increase the interest rate or ‘call in’ the loan (require that it is repaid).

Much of the initial preparation work, where you choose your floor plan and colour selections, is done before the contract is finalised and the deposit is due. Once construction starts, most homes are completed in a 16 to 24 week timeframe. That’s well within the 12 months allowed by lenders. Talk to one of our friendly consultants about the timeline of your new build, you can learn more about our process or make an obligation-free appointment here.