4 Ways to Finance a Knock Down Rebuild for Your Next Home
As great blocks of land become harder to come by, knock down rebuilds are growing in popularity. Knockdown rebuilds are a win-win solution for those who love their land but not the house that sits on. It allows you to live in your dream home without your changing address.
However, as with any building project, it’s important to be honest and realistic about your financial situation early on to prevent any issues down the line.
For all but a lucky few, one of the biggest concerns when it comes to building a new home is the question of how you’re going to pay for it. Luckily, there are a variety of options out there for anyone looking to obtain the finances to fund their knock down rebuild project.
It’s perfectly natural not to know all the terms. So, first, let’s begin with clarifying exactly what a knock down rebuild is.
What is a knock down rebuild?
A knock down rebuild is when you buy an existing dwelling and then have it knocked down so you can build a new home on the land. Ever seen a great block of land in a stunning location but thought the house itself wasn’t for you? A knock down rebuild allows you to keep the land you love and get rid of the existing house to make way for your dream home.
Why choose a knockdown rebuild?
Great locations aren’t easy to find, and with a knock down rebuild, you get the best of both worlds. It’s a fantastic way to find a place in a desirable neighbourhood, even if all the lots are taken.
Another scenario is you may be in the perfect location already, with neighbours, facilities and local parks that have become part of your life. The kids are in a fantastic school, work isn’t far away, and you and your pooch have figured out some great routes for walks. A knock down rebuild process means you can keep all this yet upgrade to a new home that suits your lifestyle perfectly.
4 Ways to finance your knock down and rebuild
Not everybody has a stacked property portfolio or the budget to build a new home. It can also be challenging to budget if you aren’t sure how much a knockdown rebuild will cost you. Moreover, many of our clients looking to knock down rebuild will need to attain a home loan or redraw on their exisiting home loan. Next, we’ll explore all the ways you can finance your home knockdown rebuild.
#1 – Consider a construction loan
One of the most common ways to get finance for a knock down rebuild is to be approved for a construction loan. As the name suggests, construction loans are specifically designed to supply financial support to those looking to build.
How to get construction loans
Construction loans are like home loans in that your bank or lender will expect you to put down a deposit. Around 20% is standard; however, different institutions vary, so be sure to investigate and ask questions. Always be clear about what the terms are before signing.
Most construction loans are interest-free for the first twelve months or until the entire amount has been borrowed. It’ll depend on which of these scenarios happens first. Again, this isn’t a guarantee, so check with your bank or financial institution to be certain about when you’ll have to pay interest.
Typically, you’ll make payments in instalments as the process goes along. Building and construction loans are designed to fit this payment pattern. Therefore, you’ll be provided with smaller amounts of money at various stages rather than receiving the entire loan at once.
Payment stages of a construction loan
- The commencement of the building contract
- When your builder lays the concrete slab
- At the end of the framing stage, when your house’s frame is complete
- At the lock-up stage, or when it is possible to lock your new house.
- When the builder has finished the fit-out
- When your home is completed.
While the above is pretty standard, things can be done differently compared to typical home loans. So, be sure to have an open chat with both your financial institution and builder about how payments will be conducted.
#2 – Use the equity of your current home or land
If you’re looking for an alternative to a construction loan, you may be able to use the equity of your existing home to cover some or all the costs. In basic terms, equity is how much of your home you own. Alternatively, it’s the difference between how much you’ve paid off on your mortgage and how much your home is worth.
As you’ve probably guessed, whether you have enough equity to make this method a viable option will vary significantly from person to person. A lender or mortgage broker may be open to allowing you to use your equity to finance your next build; however, they will likely ask you to leave a buffer (usually around 20%).
The advantage of this approach is that you’ll be given more flexibility and options regarding repayments. The downside is interest rates will kick in immediately in most cases, while there’s usually an interest-free period with construction loans. The specifics of your situation and exisiting mortgage will determine whether or not this is the best path for you.
#3 – Redraw your exisiting home loan
This method will depend on whether you have a redraw option on your current loan and whether you have any extra payments to draw from to put towards your knock down rebuild.
You’ll need to be far ahead of your current repayments to be able to redraw enough to fund the costs of building another home. The likelihood for most people is that this method would only be able to cover some of the costs, and they’ll have to take out a loan to cover the rest.
#4 – Refinance your home loan
A knock down rebuild may be a great way to refresh your home and increase its value. If you own your home outright, you may be able to finance the entire project with a refinance on your home loan.
It’s important to compare rates and terms from multiple lenders before moving forward. A knock down rebuild can be a big project, but it can also be a great way to improve your home’s value. Refinancing a home loan may not be the best option for everyone so it’s important to consult an expert.
Find the best home builder for your knockdown rebuild project
Building your perfect home isn’t just about getting financing; it’s also about spending that money wisely. Choose a licensed builder who understands council approval, the demolition process, and local zoning laws. This will make all the difference in both your building journey and the home you end up with.
New South Homes has over 35 years of experience building new houses for home buyers like you. With modern inclusions, energy efficiency, luxury additions, and a high-quality custom build, our knock down rebuild customers end up with a home that runs better, cheaper and suits them for longer. Our team of new home builders in Sydney pride themselves on putting the client first and have never built a home they wouldn’t be proud to call their own.
New South Homes can walk you through the entire knock down rebuild process and answer any questions you have along the way.
For more information on how we can help with your build or to get started on the knockdown rebuild process, give us a call on 1300 527 088.
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