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Saturday, 20 October 2012

Raising Funds for a Building Project

Choosing a lender or a bank

Providing you meet certain criteria’s, all lenders will want to lend you money.

granny flat finance in AustraliaAn exception might be when borrowing against a block of land without a house. Here, you will probably have to search a little further, or provide the lender with an idea of what you want to do with the land and when.

It pays to shop around for the lender that best meets your needs before making your decision. Don’t just take the first choice. The more you shop and take notes of the options available at different lending institutions the wiser you will become when making your final decision.

Some lenders will reject you outright because you don’t match their criteria, don’t be disheartened. For each lender not willing there is another ready to bend a few rules to help.  Some guide lines to follow are:
  • Do your comparisons:

Make some comparisons on paper between 4 or 5 different lending institutions. Financial   institutions will want your business but they may not suit your needs. Some institutions may not require a large deposit but may sting you extra charges on the other end. This kind of information will become known to you once you have written comparisons.
  • Shop Around:

granny flat financeThis will give you a better understanding of the lending institutions terminologies. Doing your own research puts you in control rather than feeling that you are being controlled.
  • Flexibility:

Always remember, without YOU a lending institution does not survive so they need to make the offer as attractive to you as are your needs to find the lender. Which lender will provide you the greatest flexibility?
  • Early Payout Clause:

Does the lender allow for early payout should you decide to put more money down than the monthly requirement, or do they impose penalties?  This is an important question because you don't know what lies ahead and you need to prepare yourself for any eventuality.
  • Banks versus Independent Brokers:

Having some banking history with one particular bank can be most beneficial. They will be looking to keep your business and although they might offer more rigidity than brokers and their interest payment terms might be higher, building yourself some creditability can offset some of the rigid rules. To keep your business, the bank might be willing to stretch a little, so don’t under estimate your power once you have collected all your data to approach them with things that their competitors are doing. Independent brokers on the other hand are more flexible to offer lower interest rates.
  • Free Financial Services:

Most banking institutions provide free financial advisors. This is a good place to start because you will be able to gather information and feedback that you can use when doing your comparisons.
  • Additional Fees:

Have you calculated what additional money you will require over and above the loan to pay for fees such as stamp duty, legal fees, administrative costs, brokerage fees etc. In some cases these fees can be added into the overall cost of the loan making your repayments more. Otherwise this is a cost that you will have to provide independent of your deposit money.

Another factor you might have to take into consideration is the case of purchasing land only with a view to building at a later stage, what will be the time frame and what money will you need to make repayments on the land loan until you are ready to draw down on the house loan.
  • Building Restrictions:

In the situation where you want to buy land and build at a later stage, does the lender or the developer or owner of the land impose some there restrictions on the land as to the time provided when you will have to build?
  • Buy Land Today, Build Later:

Discuss your full plans including the idea of when you want to build to see how you can incorporate buying the land today and how to arrange finance down the track. Sometimes better deals can be achieved if the lending institute knows the full story.
  • Government Concessions:

Check if you are elibible for any government concessions. For example, some countries like Australia and New Zealand grants are provided in order to attract first home/land buyers. This monetory assistance can be very useful addition when looking to cover other financial costs. 
  • Loan Repayments:

Have a plan in your head as to when you want to begin the building project and work out how you can achieve that as well as paying off the existing loan and living day to day also. Perhaps you are in a position where your spouse is also working, so one income can be used to repayments and the other for day to day living.
  • Interest Only versus Principle+Interest:

If you are looking to purchase land and build immediately in order to sell again, consider to look at interest only borrowings rather than interest and principle. Understand that normally when you are looking at interest and capital repayments, within the first 7 years you are only paying interest. The capital repayment does not kick in until after 7 years. Interest only loans are often cheaper.

Once you know the requirements sometimes there are ways in which you can become more creative in being able to finance your project. For the sake of repeating myself, there can never be enough research done.

In Summary:
  • Contact has many lenders to gather different loan criteria’s.
  • Evaluate the different options available to suit your needs.
  • Weigh up the benefits of flexibility.
  • Pay attention to exit penalties when you want to re-sell early.
  • Banking history can be beneficial.
  • Are you eligible for Government assistance as a first time buyer?.
  • Make sure your figures being presented to a lending institute stack up!
  • Leave a financial safety margin for any unforeseeable happenings.
  • Determine what kind of loan repayments suit you, Principal and Interest, or Interest only.
The Nova Group hopes this information is helpful when you are looking to finance your kithome or granny flat project.  Article by Michael King

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