How do I manage rent & mortgage payments while building my first home?
When building the first home your home loan needs are different to buying an established property or a completed brand new property. At FHBA, we understand that constructing a brand new home is a popular option for first home buyers looking to take advantage of the state government grants and concessions that are available. Today we take a closer look at some considerations when financing a home to be built.
In most cases, when you enter into a contract to build your first home, you are required to apply for a ‘Construction Loan’. They have a different loan structure to home loans designed for people buying an existing home. A construction loan has two splits:
- The loan on the land component (if it is a split contract between the land and construction)
- The construction component as it’s being drawn down for progress payments
Lenders will need to ensure you can service both components once the full loan amount has been drawn-down, i.e. when the property is fully complete and ready to move into.
What happens if I am renting whilst building my first home?
If you are lucky enough to be living at home whilst constructing your first home then you may not be too concerned about maintaining your construction loan repayments during your current living arrangements. However, not all of us are that fortunate and some of us have to rent either due to work or family reasons. One of the most frequently asked questions from aspiring first home buyers we get is ‘How can I possibly afford to make my loan repayments whilst I am building and saving for my first home deposit?’
Most people will come up with the obvious answers, such as:
- Reducing your living expenses to ensure you can afford to pay your rent & meet your loan repayments
- Moving back home or renting a cheaper property during this stage
- Choosing a builder that will complete construction within a short time (i.e. 4-6 months)
However, first home buyers would be pleased to know that lenders can also help you. Yes that is right – lenders can still look after you when you need them to most!
How can lenders help in allowing fhb’s to maintain loan repayments while renting?
First home buyers would be surprised to know that lenders do appreciate how hard borrowers have it when building a home, especially if you are renting at the same time! Luckily, almost all lenders that offer construction loans will allow first home buyers to reduce their repayments during the construction period of their first home or for the first year of their home loan term.
How exactly do lenders do this? Lenders facilitate this by allowing first home buyers to make ‘Interest Only’ repayments either during the construction period (i.e. until the house is ready to move into) or once the loan reaches the first year anniversary.
In the media, first home buyers may have heard about all the coverage on interest-only loans and how the regulators were cracking down on these earlier in 2017. Whilst interest-only lending is something the lenders are trying to avoid, they are still very accommodative when it comes to offering interest-only loans to first home buyers who are constructing their first home.
What is the difference between interest only and principal & interest loans?
We will use a simple example comparing principal & interest repayments (paying down interest and the loan balance down) to interest-only repayments below:
If you are looking at obtaining a $400,000 loan for your first home then your repayments for a ‘Principal & Interest (P&I) loan’ will be as follows:
Weekly repayments for Land Component: $440.40
Weekly repayments for Construction Component: $440.40
Weekly total P&I repayments: $880.80
If you are looking at obtaining a $400,000 loan for your first home then your repayments for an ‘Interest Only loan’ will be as follows:
Weekly repayments for Land Component: $307.69
Weekly repayments for Construction Component: $307.69
Weekly total interest only repayments: $615.38
Assumptions used in both examples above:
- 4% Interest Rate
- $400,000 loan
- Lender is offering the same P&I and interest only rate
- Land cost is $200,000 and construction cost is $200,000
As we can see from the above comparison between interest only & P&I repayments, first home buyers can save approximately $250 in weekly repayments by getting an interest only loan over being forced to get a P&I loan. This is the most popular method first home buyers across Australia use in order to afford to build that dream first home whilst renting in their current place of residence.
Some lenders may charge a higher interest only interest rate in comparison to the P&I rates available, however, our first home buyer Brokers/Coaches at FHBA Mortgages have access to lenders who will offer the same interest rate on an interest-only construction loan as a P&I loan once the construction is complete.
Our experienced first home buyer specialist brokers can explain exactly how interest only loans work and more importantly, what your repayments will look like while you are renting. After all, we know this is your first time getting a loan, let alone a construction loan! Simply click here to book your complimentary consultation now!
First Home Buyers Australia