Let’s face it, most of us mere mortals do not have the cash liquidity to be able to finance a KDR project ourselves which means we have to turn the banks to lend us the hundreds and thousands of dollars to make our dream a reality. I think you can only truly call your “dream home” your dream home because you chose to start from scratch and chose a builder to build it for you. This is not to say that there are people that have purchased established homes as their dream home but there’s something special in being able to decide on every aspect of a house design from tiles, kitchen, power point locations, size of the walk in robes down to the millimetre. Those fine details of your dream home costs dollars…lots of it.
Before we get carried away with our dream home and start to live in it in our minds, we have to be realistic and have a budget to work with. A budget that the bank is prepared to lend us given our current circumstances and whether it’s going to be serviceable now and into the future. We had to think about a modest build with modest upgrades so we’re trying to find a builder that would provide us a value for money proposition without compromising on quality as well workmanship. We approached a broker with an estimate about 4 weeks ago and we have been trying to keep within that budget including additional non standard site costs which is the biggest unknown component of this budget. I’m not a pessimist but I am pragmatic when it comes to our block of land and the hidden surprises it may throw at us after the site assesment, soil tests and contour surveys has been completed. So for now we have budgeted for $60k in non standard site costs which in turn greatly restricts our upgrades or variations when the time comes to select those wish list items.
Our application had been packaged by our broker and had been sent to the bank officially two days ago and we have been told that there is currently a 16 days wait before we receive an approval. I think our application is pretty straight forward and our financial obligations are quite conservative. Our financial position in terms of disposable income will be better at the end of this journey because we will only have one mortgage to service althought I’m not sure if that is relevant to the bank when it comes to reviewing the loan application.
The loan is structured as a refinance because our current lender does not meet our borrowing criteria, construction loans work a little different because they are progress payments rather than funds exchanged as a lump sum. Once the progress payments are paid, that amount will be become seerviceable but charged as interest only. After the last progress payment has been paid the construction loan then converts to a principal and interest payments. The fact that it has been designed as Interest Only during construction helps our situation because we are currently renting so the added extra repayments may have put pressure on us.
There’s a pretty straight forward explanation I found on ME Bank’s website that easy to understand.
How to calculate your construction loan repayments
Whether you’re building on newly purchased land or property you already own, our construction loans are designed to take the stress out of building. While construction is in progress, your repayments will be interest-only. They’ll gradually increase as your build progresses because your loan balance will be going up as we pay more funds to your builder.
To take the guesswork out of each repayment, you can calculate what you owe by following these two easy steps:
Calculate the daily interest.
- Multiply the loan balance by the interest rate (as a %)
- Divide this figure by 365 (amount of days in the year)
Multiply the daily figure by the number of days that the account stayed on that balance.
Let’s say your interest rate is 4%, your owing balance is $50,000, and a progress payment of $35,000 is made on the 12th of the month.
1. Calculate the daily interest on $50,000 for the first 12 days
- $50,000 x 4% = $2,000
- $2,000 divided by 365 (total days in a year) = $5.48 of interest per day
- $5.48 x 12 days = $65.75
2. Calculate the daily interest for the remaining 19 days of the month, after a progress payment of $35,000 is released. This takes the total owning balance to $85,000:
- $85,000 x 4% = $3,400
- $3,400 divided by 365 (total days in a year) = $9.32 of interest per day
- $9.32 x 19 days = $176.99
Adding these two together ($65.75 + $176.99) will give you this month’s interest-only repayment amount of $242.74.
Remember to keep in mind how many days are in the particular month you are calculating the repayment for.