Renovation Loans and the HomeBuilder Scheme

mortgage brokers

In early June, the federal government announced a new package named HomeBuilder, which was designed in an effort to keep the construction industry afloat after it was estimated that the number of new home builds would drop by 50% in the second half of 2020. The HomeBuilder scheme is expected to help support the 140,000 jobs in Australia’s construction industry as well as the jobs that are touched by residential builds such as architects, designers, engineers and project managers.

The Homebuilder scheme offers grants of $25,000 to individuals and couples who are undertaking substantial renovations to their homes.

The concern, however, lies in the fact that the Scheme may not actually assist those who urgently need financial assistance and that the criteria for receiving the $25,000 rebate is too specific and will only be satisfied by a handful of people.

Aside from the income test, to be eligible for HomeBuilder, an individual or couple must be undertaking a renovation between $150,000 and $750,000 on a home that has a pre-renovation value of less than $1.5 million. The renovation must also be completed on the primary building i.e. the house or unit, not a granny flat, pool or shed.

Will banks be providing renovation loans?

It may seem unrealistic for a couple who is earning less than $200,000 a year and living in a property worth less than $1.5m to want to spend upwards of $150,000 renovating that home with borrowed money, much less for a bank to agree to lend those funds, however, this is not the case.

The federal government believes that many will take up the offer and estimates that the Scheme will cost $688m, which equates to around 27,500 individuals or couples taking advantage of it. The banks are on board; however, lending conditions will likely be strict.

How can you increase your chances of securing a bank loan for renovations?

Be prepared with a contract that covers the whole project. Lenders do not want to see a loose plan that might result in a budget blow out, a half-finished renovation and homeowners who can’t afford to extend their loan to be able to finish the build. By having a solid contract in place, this will instil confidence in the lender that the project can be finished for a set price and to a high standard.

Most borrowers will be able to secure the funds by drawing on the equity they already have in their home. This means you will need to take out an extra loan on top of your existing mortgage, which will be based on how much the property has increased in value. This approach is the most accessible because lenders are less inclined to let someone borrow more than their house is worth, which may be the case with some more recent home buyers.

One other way of securing finance is to borrow against the future value of the property. That is, if you say you are adding $300,000 in value to a house with a $200,000 renovation, and the bank agrees, they will see the value in lending the $200,000. This approach will take some convincing as it will depend on the property, the type of renovation you plan to carry out and the certainty it will remain on budget and schedule.

Are investment properties included in the Scheme?

No. Even if you and your partner earn less than a combined $200,000 and the property is worth less than $1.5m, the Scheme does not cover investment properties, so don’t make the mistake of buying a fixer-upper thinking you can claim a $25,000 rebate once the renovations are complete.

Who does the Scheme benefit the most?

The federal government identified the drop in new home builds – many of which were cancelled in the first quarter of 2020 just as COVID-19 tightened its grip on the world – as one of its biggest concerns. Therefore, those who are planning on building a new home for between $150,000 and $750,000 will benefit the most, as will anyone who can nab an off-the-plan property for less than $750,000.

No matter what your build is, be it for renovations or an off-the-plan purchase, just ensure your contract stipulates that work is due to commence within three months of the contract date and that it is signed before 31 December 2020 to remain eligible for the grant. For more information, speak to a mortgage broker today.