Knock Down Rebuild Finance

The Essential Guide to Knock Down Rebuild Finance

In the ever-evolving landscape of homeownership, the concept of knocking down an existing structure to make way for a new, custom-built home has gained significant traction. This process, known as knock down rebuild (KDR), offers a unique set of opportunities for homeowners to craft their ideal living space without leaving their cherished neighborhood. However, navigating the financial aspects of such a project can be daunting. This is where knock down rebuild finance, or a KDR mortgage, comes into play.

Understanding Knock Down Rebuild Finance

KDR finance is a specialised mortgage product designed to fund the process of demolishing an existing home and constructing a new one on the same plot of land. Unlike traditional home loans that finance the purchase of a pre-existing house, KDR mortgages cater specifically to those looking to rebuild from the ground up.

How It Works

The knock down rebuild finance process involves several key stages, often navigated with the help of a mortgage broker specialised in construction loans. Here's a step-by-step breakdown:

• Initial Consultation: The journey typically begins with a consultation between the homeowner and a mortgage broker. This stage involves discussing the homeowner's vision, budget, and financial status to assess the feasibility of the project.

• Loan Application: Based on the preliminary discussions, the broker identifies the most suitable loan products and assists the homeowner in compiling and submitting the necessary documentation for loan approval. This documentation often includes detailed plans and specifications of the proposed build, a contract with the builder, and evidence of the homeowner's financial capacity.

• Approval and Loan Structuring: Once the loan is approved, the mortgage broker works with the homeowner to structure the loan in a way that aligns with the construction timeline and cash flow requirements. KDR loans are typically disbursed in stages, corresponding to key milestones in the construction process.

• Construction Phases Funding: The loan disbursement is phased, with each instalment released upon completion of specific construction stages. These stages might include site clearing, foundation laying, framing, lock-up, and final completion. The lender usually requires an inspection before releasing funds for each stage to ensure that the work has been completed as planned.

• Completion and Beyond: Upon completion of the construction, the loan may transition into a standard home loan, with the homeowner continuing to make regular payments against the principal and interest.

The Role of the Broker in Knock Down Rebuild Finance

A mortgage broker plays a crucial role in the knock down rebuild finance process. They act as an intermediary between the homeowner and potential lenders, providing expertise and guidance through each step. Brokers leverage their knowledge and relationships with lenders to secure the best possible loan terms for their clients. Additionally, they help navigate the complex requirements and paperwork associated with construction loans, ensuring that funding is secured in a timely and efficient manner.

Key Considerations in knock down rebuild finance:

• Budgeting: Accurate budgeting is essential in a KDR project. Homeowners must account not only for the cost of construction but also for demolition, permits, and potential rent if they need to live elsewhere during construction.
• Lender Requirements: Each lender has specific criteria for construction loans, including down payment percentages, builder approval, and inspection protocols. Understanding these requirements upfront is crucial.
• Interest Rates and Fees: KDR finance may come with different interest rates and fee structures compared to standard home loans. Homeowners should discuss these details with their broker to ensure the loan aligns with their financial plans.

How much does a Knockdown Rebuild cost?

To best determine how much you may need to borrow for a knockdown rebuild loan, you’ll want to determine just how much the project may cost you. This involves costings from multiple parties and it can be complicated to estimate exactly just how much a knockdown rebuild will cost you. It can depend on the type of house you wish to build to replace your existing dwelling. You’ll also need to consider the expense of the demolition of the existing dwelling. This can vary depending on the complexity of the knock down and needs to factor in access to the block, presence of asbestos or other regulated substances and materials.

Then, there’s the cost of the new dwelling build itself. This is entirely dependent upon your taste ad preference around facades, fixtures and fittings and inclusions. This is entirely builder-centric and you may want to consider a ‘fixed price contract’ which can help you avoid any unknown or unforeseeable nasty expenses that can inevitably arise.

It must not be forgotten though, that you can actually potentially save quite a bit of money by knocking down and rebuilding over purchasing a new home, given the fact that you do not need to pay stamp duty on the building of the new dwelling.

Opt for a Building and Construction Loan

A popular choice for financing a demolition and rebuild is a building and construction loan. These loans are specifically designed to align with the financial demands of the construction stages, accommodating the builder's payment schedule which often doesn't require the total sum upfront due to the variable nature of construction work. Key payment stages typically include:

• Initiation of the contract
• Slab laying
• Frame completion
• Securing the premises
• Interior fit-out completion
• Completion of construction

Leverage Your Land's Equity

Your land has value, even with the intention to demolish any standing structures. Equity is the share of the property you truly own, calculated by the market value of your land (with or without the house) minus any outstanding mortgage amounts. This equity can significantly support your rebuild project under an existing mortgage.

For example, if your property is valued at $800,000, with the land alone appraised at $600,000, a lender might offer to lend up to 90% of the land's value minus what you've already paid on your mortgage. This strategy utilizes the land's equity to potentially eliminate the need for a savings deposit for the rebuild.

Redraw Facility on Your Mortgage

If your mortgage includes a redraw facility, which allows for additional payments to be withdrawn as needed, this could be another avenue to fund your rebuild. This option is contingent on having made substantial payments towards your existing mortgage, possibly in conjunction with another financing method, to support the construction

Knock down rebuild finance offers a pathway to creating your dream home, blending the benefits of new construction with the joy of staying in a beloved locale. By understanding the stages and processes involved, and with the guidance of a skilled mortgage broker, homeowners can navigate this journey with confidence. This financing option unlocks the potential for transformation, turning the vision of your perfect home into a tangible reality.