If only a knock down rebuild was as simple as bulldozing an old home and putting a new one in its place. The reality is often a lot more complicated and can involve hidden costs and unwelcome surprises.
This might include finding asbestos or coping with the costly replacement of aged water, electrical and sewer infrastructure. The existing foundations might also cause trouble because if they are not up to the job of supporting a new home, they will have to be excavated and replaced.
The demolition cost may vary greatly between contractors so it’s worth getting a few quotes. The price will depend on issues like how easily the site can be accessed, what sort of materials are involved and what can be salvaged and sold. You may have to pay extra to completely clear the site of rubble or have it filled and levelled.
To compensate for these issues, it’s important to buy the land at a good price and have wriggle room in your finances. A common way to finance a knock down rebuild is with a construction loan. Here’s how they work.
You can draw funds as required
Unlike a traditional mortgage where you receive a single lump sum payment, a construction loan allows you to draw funds from the loan progressively as your invoices arrive – progress payments.
You pay less interest during construction
You can save money during construction because you will only be charged interest on the money that has been drawn down, not the full loan amount. The interest rate on a construction loan can be higher than a standard home loan, but this is usually only during the period of construction. Once your building is complete, it may drop to a standard interest rate.
The repayments are also lower
Your loan is interest only during the construction period, which frees up your cashflow for other expenses. This is particularly handy if you are renting accommodation until your new home is complete.
How much you can borrow will vary between lenders
Normally the property would be valued as the land value less the cost of knocking down the old home. Construction loans are assessed by lenders in different ways and the loan to value ratios (‘LVR’ – the maximum proportion of the property’s value you can borrow) will depend on factors like whether you are using a licensed builder and the property’s estimated value. You will need to show proof of income, evidence of genuine savings or even council approved building plans and a fixed price building contract.