Opting for knocking down your old home and having a new one built in its place can be a very cost-effective way to get your dream home. But there’s no doubt that the process costs money. How will you finance knocking down and rebuilding your home? There are various ways you can fund a knockdown and rebuild project. Here are the ones you should know about:
Construction or building loans
The majority of people who decide on a knockdown and rebuild opt for a construction loan. Such a loan is designed specifically to provide needed funds in a manner that corresponds to building milestones and payment requirements during construction.
Builders will not normally ask for bulk payment. Generally, they will get paid at certain points during the building process. A construction loan will allow you to draw on the borrowed funds when you need them instead of getting the entire loan amount in a lump sum from your bank. This is referred to as a “progressive drawdown.” It provides you with a portion of funding at a specific building stage.
For a construction loan, the bank will allow you to borrow close to 95% of the property value plus the cost of construction; minus the costs of demolition of the old home. The main benefit is that you only pay the interest on amounts that you have drawn instead of the total amount of the loan.
Use the equity of your existing home
Another alternative to construction loans is to use the equity of your existing property. Your equity is how much of the home you own or the difference between the value of your home and the amount you owe on the mortgage. Lenders will often allow you to use some of the equity to finance your knockdown and rebuild project. However, you may be asked to leave as much as 20% as a buffer. It may be only about 5% with Lenders Mortgage Insurance.
The major advantage of this option is that you will have the flexibility to pay for the project. But the disadvantage is that you will be paying interest from the time the loan has been taken out, unlike that of a construction loan.
Check out Kaplan Homes simple 60 second easy finance checklist that will help you see if you are eligible. Kaplan Homes are a Sydney-based new home building company who offer competitive financing options that can make owning your dream home a reality.