borrowing interest payments for construction period

[monster24]

Hi there,

we have finally finished building our first IP. We got the land (1/2 acre) for a great price, put a nice house on it and tenants are waiting to get in. The process of building was slow (7 months) and we paid interest for the land and increasingly for the build from our daily life. It worked out alright, especially if I see that we owe $280K and similar houses in the same area are on the market for $497K, so my guess is that we have already $150K+ equity in there.

BUT: If we want to do it again, I think I would feel more comfortable to borrow some additional funds to cover the interest payments during construction. If I add this to the total price (maybe another 15K or so) I am still better off compared to buying ready-to-go house-and-land packages. We had a look and house and land packages are all in $360K+ area. So, I would still have a big advantage of choosing my own house/builder compared to the overpriced house and land packages.

My question is can we incorporate this "under construction" interest payment into the total loan contract??

Cheers
Thomas

 

[tobe]

I have done this for some of my clients. I mainly do construction finance. Note, the loan would need to be crossed with another property with available equity or a similar arrangement. Although you are buying the property at a substantial discount, and there is available equity there to tap over and above the building cost, most lenders will calculate their LVR on only the purchase price of the land plus the constrcution cost of the building. TO access the increased equity after building, you would need to re-finance and have a new valuation performed.

 

[monster24]

thanks for the information. We are actually thinking of changing banks anyway for another deal. So, the idea is to access the $150K+ equity in our first constructed (and soon rented) IP to buy land and construct again inclusive the interest during construction. Do you mean I have to refinance my existing loan for the first contructed IP ?
Thanks
THomas

 

[Peter_Tersteeg]

The easiest way to do this is to borrow the appropriate amount from equity in your existing property. I would strongly discourage cross-collateralisation if it can be avoided (there's lots of reasons, which has been discussed on Somersoft many times, do a search on 'cross collateralisation').

Assuming you've got the apporiate equity and meet the lending criteria, this process would be fairly straight forward.

As Tobe suggested, you have to wait until project completion to access equity in the new contraction. There are development loans available to access equity prior to completion, but these types of loans probably wouldn't suit the project you're working on. They would also be more expensive in the long run.

 

[tobe]

If you want to borrow more than the purchase price of the next IP (your second?) so you can capitalise the interest, you will need to re-finance from another property, either your o/o or your first IP with the capital gain.
You can either re-fi with your current lender (be aware as some lenders refuse to look at vals less than 6-12 months since the last appraisal) or switch to a new lender.
There are quite a few threads about cross collatoralising, or doing multiple purchases with the same lender using more than one security per loan, to research. In a nutshell doing it with one lender will give you a simpler loan statement, and perhaps save some val and application fees. Structuring it as stand alone for each property will set you up with more flexibility for the future.