Land/Construction Loan

A question for the many experienced brokers on here. Partner and I are looking to purchase a block of land inner city for $450k max, ideally with a 95% plus capped LMI (as we only have $45k cash available for the deposit), and then selling our current PPOR to build on the block to become the new PPOR. Sale of the new PPOR will release at least $80k cash, which will be the deposit on a $400k build (20% deposit).

I?ve been speaking to a broker and he stated we?d be up for ~$15k LMI on the land purchase, and therefore suggests we go for a 90% loan instead, pulling $20k equity out of current PPOR to use as a deposit and bring the LMI down to $8k. Great, save $7k. My concern is doing that would mean we have $20k less in cash on the sale of the PPOR and therefore less of a deposit/contingency for the construction component of the loan later.

Correct me if I?m wrong but upon signing a fixed price building contract, the bank will re-calculate LMI based on total loan amount (land + build) and then subtract the LMI already paid. So based on my calculations below, the only real difference is that the total LMI is paid up front, rather than ?staged? and I?d also have more cash available in the lead up to the build under a 95% lend on the land.

Option 1 ? 95% lend on land
Land ? 450k
Costs - $21k
LMI - $15k
Deposit - $44k
Land Loan $442
Cash after PPOR sale - $80k
Build cost - $400k
Build loan $320k.
LMI topup after recalculation ? Nil?
Total Loan - $762k
Total asset value - $850k / 89.6% LVR

Option 2 ? 90% lend on land
Land ? 450k
Costs - $21k
LMI - $8k
Deposit - $66k (using cash plus $20k equity)
Land Loan $413
Cash after PPOR sale - $60k
Build cost - $400k
Build loan $340k.?
LMI topup - $6k
Total Loan - $759k
Total asset value - $850k / 89.2% LVR


Are there any other showstoppers with going with a 95% lend?
 
Sorry some more info

combined income - $250k plus bonuses
PPOR debt - $372k plus ~$90k in equity loans for 2 IP's. total $462k
PPOR bank val - $560k (agent appraisal high 5's)
2 other IP's - debt - $760k
bank val - $870k
Credit card - $15k

All loans are with BW at the moment and with this new loan I would like to steer away from them to avoid having all eggs in the one basket
 
BW is the only lender that will consider Option 1 - maybe BoQ but can't remember of the top of my head if they'll do it for land only. Your options are severely limited doing it this way. Credit scoring will be very harsh too - Option 2 had higher chance of success.
 
Thanks Jess. How harsh will their scoring be? i.e. are we talking strong chance of having the loan app knocked back? or moreso the broker has his work cut out for him?

I think we have strong serviceability and job stability. BW recently (Feb 2015) re-valued all 3 properties and based on that our overall LVR is about 87%. PPOR repayments have always been almost double the min P&I repayments. I'd like to think we have a fairly strong credit rating.
 
RAMS 98.5% including LMI capped for o/o. They can do land at 98.5% and construction at 98.5%.

You need to show that you can service the land debt whilst renting of course and they don't credit score.

They have also got a new mortgage insurer their LMI premiums are cheap as chips :)
 
Re - credit scoring, it's hard to say. They tend to be a bit of a black box and can change without notice. I tend to err on the cautious side where at all possible, esp at super high LVR's.

Are your current properties cross collateralised? If they are, you might not get your $80k from the sale of your PPOR - you might find the funds get used to bring your IP LVR's down to BW new IP 'ideal' which is 80%.

Best to check this before getting too far ahead with your planning!
 
RAMS 98.5% including LMI capped for o/o. They can do land at 98.5% and construction at 98.5%.

You need to show that you can service the land debt whilst renting of course and they don't credit score.

They have also got a new mortgage insurer their LMI premiums are cheap as chips

what's the catch? and what are we talking in terms of 'cheap as chips' LMI? :)

Re - credit scoring, it's hard to say. They tend to be a bit of a black box and can change without notice. I tend to err on the cautious side where at all possible, esp at super high LVR's.

Are your current properties cross collateralised? If they are, you might not get your $80k from the sale of your PPOR - you might find the funds get used to bring your IP LVR's down to BW new IP 'ideal' which is 80%.

Best to check this before getting too far ahead with your planning!

No x-coll on any loans, all separate equity and home loans secured against individual properties.
 
what's the catch? and what are we talking in terms of 'cheap as chips' LMI? :)

and they do 15 IO......

They rates aren't the sharpest, crappy internet banking but no real kickers.

On a serious note RAMS product may or may not be suited to you so engage a professional that may give you some alternatives or they may decide that RAMS is in fact the best product.

The issue is that brokers wont recommend RAMS because a) they have no idea about their offering and niches and b) they don't get paid as they can't write the loan.
 
Thanks Shahin

Just had a look online and their rates are 4.5% (slightly better than 4.52% @ BW) and allow 100% offset, no application fees (special til 31 Aug) and no monthly fees. Couldn't find any info on their 'risk fee'/LMI though to get an idea of what the $ look like there?

Have you had any experience with them when trying to pull equity out later?
 
Sorry my mistake. I was looking at the low rate home loan with 4.5% interest but max LVR is 95%. for the 98.5% LVR loan rate goes up to 5.4%. everything else remains.
 
Thanks Shahin

Just had a look online and their rates are 4.5% (slightly better than 4.52% @ BW) and allow 100% offset, no application fees (special til 31 Aug) and no monthly fees. Couldn't find any info on their 'risk fee'/LMI though to get an idea of what the $ look like there?

Have you had any experience with them when trying to pull equity out later?

There is no risk fee or anything like that. They are ok with equity releases but I think that landscape is starting to change. RAMS havent made any changes though to their credit policy as their book isnt flooded with investment loans like bankwest is.

Call them and get them to give you a quote on the LMI and then report back.
 
Id suggest getting the full land and construction loan formally approved first, before committing to the land. Don't let the builder or land agent railroad you into doing the land first, because they cant produce a build contract that quickly, or the land is going to sell quickly etc.

You can have the approval subject to the sale of your home. Its important to get the valuation and LMI approval done on both the house and the land though.

Rams do 98.5% loans, and they don't credit score. Their serviceability isn't too bad as they pretty much take OFI debt at actual.
They have increased their floor rate recently with the Westpac group changes.
I'm pretty sure they only do max 90% over $750,000 security value however, which looks like it would scupper this deal.

Rams franchisee's do take referrals from brokers. Brokers don't receive as much commission as they would with other lenders (its negotiated with individual franchisees), and they do lose some 'ownership' of the client.

In the OP case however its likely not going to be relevant, if they can do the land purchase and construction together, as they will only need a 90% lend in any case (depending on the eventual sale price of the current PPOR)
 
Shahin - Spoke to a lending manager at RAMS and LMI on the land would be about $13k, so slightly cheaper than BW by $2k. They'll also cap LMI at a 95% lend with the low rate (4.5%)

Tobe - we can't do the land and construction in one (I think) as this isn't a house and land package. We'll be doing a custom build and tendering the project once we have a design, DA approval etc, so could be 6 months away. And won't be putting our current PPOR on the market unless we have an offer accepted on the land.

Max 90% over $750k is OK as we'll be on the cusp of it anyway and so should be able to either find a couple thousand dollars, or cut costs from the build (or ideally bring it in well under $400k).
 
Doing a custom build at 95% LVR is a little risky if you ask me.

In terms of the 750k cap, that relates to the value of the property, not how much deposit you will contribute.

In other words, the maximum you can borrow at 95% is $712,500 Plus lmi,or if the total project values more than $750k 90% is the maximum, so $675,900 if the valuation is $751,000 etc.
 
ah ok, got it. Total project LVR would be sub 90% anyway, it's just the initial land purchase that will be 95%, then with the sale of current PPOR we'd free up a heap of spare cash to bring the overall LVR right down when we add the construction to the loan.

sub 90% LVR assumes the bank literally adds land purchase ($450k) to build cost ($400k), so 90% LVR based on end value of $850k. The market value of the end product would be $950k-$1,050k conservatively, which brings the LVR down even further.
 
ah ok, got it. Total project LVR would be sub 90% anyway, it's just the initial land purchase that will be 95%, then with the sale of current PPOR we'd free up a heap of spare cash to bring the overall LVR right down when we add the construction to the loan.

sub 90% LVR assumes the bank literally adds land purchase ($450k) to build cost ($400k), so 90% LVR based on end value of $850k. The market value of the end product would be $950k-$1,050k conservatively, which brings the LVR down even further.

Your margins are too skinny. Definitely don't assume the end value to be more than the cost. Even if by some miracle the valuer says the end value is more than the cost, the bank and mortgage insurer will use the cost for working out the lending ratio, without exception.

Get a long finance clause on the land, get a building contract organized and get the valuation and formal approval done for both before committing to the land. Later on if you decide to change the build contract, or add some more stuff etc, that's fine, but in the first instance you know what you are playing with.
 
Shahin - Spoke to a lending manager at RAMS and LMI on the land would be about $13k, so slightly cheaper than BW by $2k. They'll also cap LMI at a 95% lend with the low rate (4.5%)

Tobe - we can't do the land and construction in one (I think) as this isn't a house and land package. We'll be doing a custom build and tendering the project once we have a design, DA approval etc, so could be 6 months away. And won't be putting our current PPOR on the market unless we have an offer accepted on the land.

Max 90% over $750k is OK as we'll be on the cusp of it anyway and so should be able to either find a couple thousand dollars, or cut costs from the build (or ideally bring it in well under $400k).

Awesome WIN!
 
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