Navigating Fluctuating Costs for Builders

As a builder in Australia, you’re a master of turning plans into reality. But when it comes to financing that dream, fluctuating building material and labor costs can introduce a layer of uncertainty. This article addresses how potential cost increases during construction can impact your home loan and your ability to repay it.

Understanding Loan Types

There are two main loan options for builders:

  • Construction loan: This loan disburses funds in stages as construction progresses, with valuations ensuring you stay on budget.
  • Land & Construction loan: This combines the purchase of land and construction financing into a single loan.

Cost Fluctuations and Loan Impact

The concern is that rising costs during construction could push the project beyond the initial loan amount. Here’s how each loan type handles this:

  • Construction loan: If costs rise, you’ll need to present a revised budget and valuation to the lender. They may approve an increase within certain limits. However, this could affect your loan-to-value ratio (LVR) and potentially require a larger deposit.
  • Land & Construction loan: Similar to construction loans, you’ll need lender approval for exceeding the initial budget. The impact on LVR is also a factor.

Mitigating the Risk

Here are some steps to safeguard your project and loan:

  • Accurate budgeting: Factor in a buffer of 5-10% to account for potential cost increases.
  • Fixed-price contracts: Negotiate fixed-price contracts with suppliers whenever possible to minimize cost fluctuations.
  • Open communication: Maintain transparency with your lender. Update them on any cost changes and proactively seek solutions.

Getting Expert Advice

A qualified mortgage broker can help you choose the right loan type, understand the terms, and navigate potential cost increases. They can also advise on:

  • Valuation contingencies: Some lenders offer loan products with built-in contingencies for unexpected cost increases.
  • Progress payments: Negotiating higher progress payments with the lender based on a more detailed budget can provide some breathing room.

Building with Confidence

By understanding loan options, implementing cost-control measures, and seeking professional advice, you can manage the impact of fluctuating building costs. This will ensure a smoother loan journey and allow you to focus on what you do best – building exceptional homes.