Understanding the Home Builders Grant, Construction Loans and How They Interact
Walking you through the process, and the considerations.
Disclaimer: Before we dive into this article it is important to note that the below information contains general advice only, not personal financial advice. Before you take any action it is important to consult with a qualified financial adviser or mortgage broker who can appropriately assess your unique situation. For a discussion personalized to your needs, reach out to us here!
So, without further ado- let’s dive in!
First off, what is a construction loan?
A construction loan is a very specific type of loan that has been designed to help fund the building of a new home. Given its specific nature, these loans are a bit more complicated and structured than your standard home loans. Interest may also be charged at a higher rate, as the home doesn’t exist yet- making it harder for a lender to assess the value of the property.
Typically, you would only pay interest-only repayments for the duration of the build, which is usually set at 12 months, however, this needs to be discussed with your lender. Once your construction has been completed your repayments will revert to principal and interest for the duration of the mortgage term, which is the period known as the ‘end loan’.
How Construction Loan Progress Payments Work
Lenders will typically make progress payments throughout the different stages of the construction project. It is quite normal for these payments to be made directly to the builder upon the completion of each stage. Although it can vary from project to project, the stages of the development and payments generally follow the below 5 steps:
- The Base, or Slab Down: This payment will go to cover laying the foundations of your property. It could cover the plumbing and waterproofing of these foundations too.
- The Frame Stage: This payment will be to cover the costs of building up the frame of your property. It can cover some of the brickwork, roofing work, and windows
- The Lockup Stage: This payment will go to help cover the costs of putting up the external walls, the windows and the doors- all the things to make sure you are able to “lock-up” your home
- The Fixing, or Fit Out Stage: This payment will cover the costs to install your internal fittings and the fixtures for your property. Examples of what this stage’s payments can cover include the plasterboards, part-installation of your cupboards and benches, plumbing, electricity and any gutterwork you may need done.
- Completion: This is typically the final payment for the building process. It generally goes to cover the costs for the end of the contract, which can be anything from the final builder and equipment payments, plumbing, electricity or the overall finishing clean for the property.
Construction loans are structured so that the interest is calculated based only upon the funds withdrawn at that stage. For example, if you are on stage 2 and have drawn down $85,000 of your $500,000 construction loan you would only be charged interest on that $85,000. However, this can vary from lender to lender so it is important to discuss this with them, or with your broker.
What is the Home Builder Grant?
Potentially one of this year’s most discussed Government stimulus packages is the HomeBuilder Grant, announced in early June 2020, as one of the responses to the COVID-induced economic decline. But what exactly is this Grant, and why has it generated so much attention? How can you potentially leverage this grant, in conjunction with a construction loan, to build or renovate your home?
First, let’s cover off the basics of both the HomeBuilder Grant, and a Construction Loan. Put simply, the Home Builder Grant is a federal government grant of up to $25,000 that is payable to eligible homeowners to either build a new home, or substantially renovate their existing home. This grant is only eligible on building contracts signed between 4th June 2020 and 31 December 2020, and it is a compulsory requirement that the construction must begin within 3 months of the contract signing date, in most states.
Due to the Stage 4 restrictions placed on metropolitan Melbourne and the Stage 4 restrictions across regional Victoria, there has been a blanket extension of 3 months to the construction commencement requirement for the grant. This means that all applicants for the HomeBuilder Grant that are based in Victoria have up to 6 months from the date of signing of their building contract to commence construction. The time-frame for signing the contract (before December 31) remains the same, however. For more information, please head over to Victoria’s State Revenue Office grant informational page here.
So, if you are looking to complete $200,000 worth of renovations to your home in Victoria, and you sign your building contract on September 30th 2020 you would have until March 30th to begin construction. However, there are always last minute hitches so it would probably be prudent to err on the side of caution, and begin well before the six months is up!
Homeowners will need to build a new home that is valued under $750,000, or spend between $150,000 to $750,000 on renovations for a property valued up to $1.50M. Renovations under $150,000, or properties valued above $1.50M do not qualify for this grant.
This HomeBuilder grant and construction loans are closely linked together and operate in the same space, as construction loans are quite often the preferred financing method for renovations over $100,000 and the construction of homes. Many customers prefer using a construction loan over a line of credit for renovations or building projects as they are structured specifically so that the payments cover the costs of the building or renovations in staged releases, as negotiated between the homeowner and the builder. This additional structure in the staged release of payments can offer more security, oversight (and maybe spending discipline!) around the payment process than if the homeowner had simply taken out a line of credit.
It is important that you secure the construction loan finance most suitable to you before you apply for the HomeBuilder Grant. All necessary plans and contracts between the homeowner and the builder need to be finalised before December 31st in order to qualify for the $25,000 grant.
Qualifying for the Grant
So, how do you know if you’re eligible for the grant? As briefly outlined before, there are a number of criteria that you must meet before you qualify for the $25,000 HomeBuilder payment. These requirements are laid out below in more detail.
To be eligible for the HomeBuilder grant you are required to:
- Sign your building contract after 4th June 2020 and before 31st December though a licensed or registered builder. If you signed a building contact on June 3rd then you do not qualify.
- Begin the construction of your new home, or commence your renovations within 3 months of the building contract date. For example, if you sign the construction/building contract on September 1 2020, your builder needs to have commenced his construction work before December 1st 2020. Unless you are based in Victoria, where, as covered off before, you have six months from the date of signing the contract to commence building.
- Be earning below a specific income cap. If you are applying for the grant as an individual then your 2018-2019 tax return must be an amount below $125,000. If you are applying for the grant as a couple then the combined income on your 2018-2019 tax return must be below $200,000.
- Own, or be in the process of buying the property in your own name. The property cannot be owned by a company or a trust.
- Be an Australian Citizen. The scheme unfortunately is not available to anyone who is not an Australian citizen.
- Be buying an off the plan apartment or townhouse that you have signed a contract to buy on or after 4th June 2020 and on or before 31 December 2020 and construction needs to start on or after 4 June 2020 (and no later than 3 months after the contract is signed). This means that even if you are wanting to purchase an off-the-plan property and have signed the contract after June 4th, if the construction started before June 4th then you are not eligible.
- Be substantially renovating the existing home that you live in. The value of your house and land (collectively your “home”) is not more than $1,500,000 and the renovations will cost between $150,000 and $750,000. It is a requirement that the renovations are being undertaken in order to improve the accessibility, livability and/or safety of your home. You cannot use the grant to build things outside of your home like a swimming pool, tennis court or sheds.
- Be building a new property that you will live in as your home, where the total value of the property (house and land) is not more than $750,000. You cannot use the HomeBuilder grant for an investment property.
When do I get paid?
The timing on when your grant will be paid is dependent on both your successful application and the type of construction work you will be doing. If you are intending to:
- Complete a new build: the grant will be paid after foundations have been laid and the first progress payment has been made to your builder.
- Undertake a substantial renovation: the grant will be paid after construction has commenced and evidence is submitted showing that payments of at least $150,000 have been made to the builder.
- Sign an off-the-plan home/new home contract: the grant will be paid after evidence is submitted showing that the property has been registered in your name on the certificate of title; and you have to be registered on the certificate of title as the owner of the property by no later than 31 October 2022.
Once all eligibility criteria have been met and the required supporting documentation provided, the grant will be paid into your nominated account. It is a requirement that the nominated account be an Australian cheque or savings account.
Do I have to be a first home buyer to qualify?
Good news for existing homeowners with more than one property, no- you do not need to be a first home buyer to get the $25,000 HomeBuilder grant, as long as you are able to meet the eligibility criteria above. Also as outlined above, the property for which you are applying for the grant does need to be your principal place of residence, however, (meaning that you are living there), not an investment property.
So, should you purchase an existing apartment, or should you use this grant?
The short answer is, that really is up to you. Your financial situation is completely unique to you, and only a qualified financial planner will be able to provide some insights into whether or not it would be appropriate for you to leverage this grant opportunity. For some, this grant could be an excellent opportunity to complete renovations or builds they have dreamt of and planned for years. For others, the stress of building is simply not worth it, and the idea of purchasing an existing property is a much more attractive option.
Let’s look at a comparison…
Tom is looking to purchase a property and has just found an apartment worth $600,000 that he is interested in. Tom has completed his due diligence on the apartment and wants to secure his finance, in order to put in an offer. Tom has saved up $120,000 for a deposit. This is 20% of the purchase price, which means Tom will not have to pay for Mortgage Lender’s Insurance (LMI). As this home already exists, and Tom isn’t planning to complete any major renovations, Tom is able to apply for a standard home loan. Pending the application submitted, and speed at which the mortgage broker and bank operate, Tom should be approved for his loan within 3-6 weeks. Tom has no need for a construction loan, or eligibility to apply for the HomeBuilder’s grant.
Alex, on the other hand, wants to build her own home. Alex has saved up $90,000 and currently owns a piece of land worth $500,000 with existing approval to build a residential dwelling. Alex’s builder has quoted her $350,000 for the end-to-end build process, from laying down the base to final finishings. These numbers mean that Alex is eligible to apply for the HomeBuilder’s grant, however, first, Alex requires an additional $260,000 to be able to fund this build. As the house does not yet exist, Alex cannot apply for a home loan and instead must apply for a construction loan. Her application for a $260,000 construction loan is approved, and Alex’s builder commences. As Alex is building a new house, her HomeBuilder grant will be paid in full once the foundations of her home have been laid, and she has made her first payment to the builder. As her first payment costs $30,000 to lay the foundation the $25,000 grant will be paid in full once she makes this first payment to the builder, meaning that Alex only has to pay $5,000 herself.
By purchasing an existing home, Tom is saving his time and not taking on any building-related stress. By opting to build her new home, Alex will save up to $25,000 on her renovations. While opting to build or substantially renovate a property instead of purchasing a new dwelling could cost you less financially, it may cost you more both in time and energy. Bear in mind that construction loans tend to charge a higher interest rate as well, so if the building is delayed through the stages the interest payable that you accrue could put a dent into the savings you had predicted you’d make by going down this path.
For the purposes of these examples, both characters are Australian citizens who are single and earn below the single’s income cap.
If you are renovating a property, the work is required to be completed by a registered or licensed builder. You cannot employ your mate who’s dabbled in some handiwork at home to complete the renovations for you. And, as outlined previously, the renovations or building work that the grant will cover needs to improve the accessibility, livability and safety of the property.
The HomeBuilder Grant Exclusions
As briefly mentioned before, the grant is only available for building contracts, with licensed builders. The other exclusions that apply to this grant include:
- Any building or renovation work done on an investment property
- Any building or renovation work done on a home with a value of over $750,000 (land value inclusive)
- Building a Granny Flat
- Doing your own building or renovation work. All work must be done through a licensed builder
- Anyone who is not an Australian Citizen
- Building or renovating a swimming pool, tennis court, outdoor spa, sauna, shed, or garage.
Consider seeking a mortgage broker or financial adviser before taking your next step…
We hope you found this article informative. The team at Pursue Wealth and Pursue Property are on hand to answer any questions you have. Whether you are in the position to begin this process, or you are still unsure if it’s the right move for you, our team is always happy to have a chat!
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This is general advice only and does not take into account your financial circumstances, needs and objectives. Before making any decision based on this document, you should assess your own circumstances or seek advice from a financial adviser and seek tax advice from a registered tax agent. Information is current at the date of issue and may change.