Becoming an owner-builder means significant savings can be made on labour and materials, while placing you in the driver’s seat with control over the finished product. Sure this may sound like the best of both worlds, but the ultimate success of your new home build will depend on your skill and experience - not everyone can be Bob the Builder after all.
What is an owner builder construction loan
Owner builder construction loans are specifically tailored for Australians seeking to build their own home or renovate an existing dwelling. These loans differ from traditional mortgages as instead of receiving your loan all at once, the lender releases the loan in stages and pays the builder directly with progress payments.
A significant advantage over traditional home loans is with owner builder construction loans you only pay interest-only instalments on the money you use. Owner builder construction loans also have interest-only repayment options during the build period, before reverting to a standard principal and interest (P&I) loan post-construction.
As a rule of thumb, generally Australian lenders are conservative when it comes to providing home loans to owner builders. This is because of the extra risk of managing a long-term project through to completion as well as a budget.
Managing a budget in itself is a complex and long-term task - any episode of ‘Grand Designs’ would show this. If you have the experience necessary and ultimately the time available to complete the job, owner builder loans can be a handy way to access finance and leverage.
— No Context Grand Designs (@ukgranddesigns) November 24, 2021
Building a home? This table below features construction loans with some of the lowest interest rates on the market.
| Lender | Home Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Repayment type | Rate Type | Offset | Redraw | Ongoing Fees | Upfront Fees | Max LVR | Lump Sum Repayment | Additional Repayments | Split Loan Option | Tags | Features | Link | Compare | Promoted Product | Disclosure |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
6.43% p.a. | 6.69% p.a. | $2,679 | Interest-only | Variable | $0 | $530 | 80% |
| Promoted | Disclosure | ||||||||||
6.44% p.a. | 6.85% p.a. | $3,141 | Principal & Interest | Variable | $395 | $null | 95% | |||||||||||||
6.64% p.a. | 7.03% p.a. | $2,767 | Interest-only | Variable | $null | $720 | 90% | |||||||||||||
6.64% p.a. | 7.10% p.a. | $2,767 | Interest-only | Variable | $0 | $530 | 80% | |||||||||||||
6.78% p.a. | 6.82% p.a. | $2,825 | Interest-only | Variable | $0 | $450 | 80% | |||||||||||||
7.05% p.a. | 6.24% p.a. | $3,343 | Principal & Interest | Variable | $0 | $1,212 | 70% | |||||||||||||
7.24% p.a. | 8.01% p.a. | $3,017 | Interest-only | Variable | $20 | $644 | 90% | |||||||||||||
8.39% p.a. | 8.72% p.a. | $3,806 | Principal & Interest | Variable | $0 | $0 | 75% | |||||||||||||
8.45% p.a. | 7.71% p.a. | $3,521 | Interest-only | Variable | $0 | $1,212 | 90% | |||||||||||||
8.68% p.a. | 8.75% p.a. | $3,909 | Principal & Interest | Variable | $0 | $900 | 80% |
Construction loan stages
When it comes to your owner builder construction home loan, each construction stage is critical to receiving funds for the build. Each stage is assessed by the lender before it releases funds for the next stage to proceed. The release of money on your behalf is known as a draw-down on your loan.
Typically, building a house has a number of construction stages including:
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Preparation – includes plans, permits, connection fees, insurance.
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Base – includes concrete slab, footings, pad and base brickwork.
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Frame – the house frame is complete and approved.
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Lock-up – the windows and doors, roofing, exterior and insulation are all done.
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Fixing – kitchen cupboards, appliances, bathroom and toilet are all in. Plumbing and electrics are done. Your home is plastered and painted.
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Completion – fences up. Site tidied. Any builders or tradespeople receive their final payment.
Becoming an owner builder
When considering building your own property, it helps to know the rules and regulations before you start. Each state and territory can vary, so for the following example we’ll use Queensland.
Depending on the value of the work, in Queensland if you want to undertake or coordinate any domestic building work valued at $11,000 or more – whether it be to build a new home or renovate an existing one – you must obtain an owner builder permit.
The value of building work is determined by calculating the cost of all materials and the cost a licensed contractor would charge you for the work, including GST.
Owner builder permits are issued across the sunshine state by the Queensland Building and Construction Commission (QBCC) and will only be given to an applicant named on the title of the home. The owner builder status will remain on the title of your home for six years.
You wouldn’t drive a car without a license, so if you carry out owner builder work without a permit, relevant Government bodies will issue you a fine. Each state or territory tends to be slightly different, so read up on the rules before you hammer the first nail.
Work you cannot complete as an owner builder
Say you have been approved for your owner builder permit (congrats!), it’s important to note that there is some specific work that cannot be completed on your own, unless of course you hold a relevant occupational license. This work includes:
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Occupational work such as electrical work, plumbing, draining, gas-fitting or pest control
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Fire protection or mechanical services work in excess of $1,100.
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Build commercial or industrial buildings (e.g. shops, industrial sheds, farm buildings)
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Removal of more than 10 square metres of asbestos
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Build or renovate multiple dwellings (e.g. duplexes, attached granny flat, block of units).
Doing these tasks without the relevant license may attract a fine. In your eyes installing a light switch may be simple, but in Queensland for example, unlicensed electrical work could attract a fine of tens of thousands of dollars.
Obtaining an owner builder construction loan
Receiving approval for an owner-builder construction loan is more difficult than obtaining a standard home loan, and frequently involves plenty of paperwork. This is because in addition to assessing your suitability as a borrower, the lender also has to look at the risks involved with the dwelling you’re proposing to build. Lenders will typically ask to see:
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Specific written details such as council plans and permits for the construction
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Your fixed-price contract (if you are working with a builder)
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Your progressive payment schedule (if you plan to do the work yourself)
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Insurance provisions
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Contingencies if plans fail or run behind schedule
This is on top of all the usual paperwork that comes with home loans including proof of identification, income details, existing assets and liabilities and monthly bills and financial commitments. Provided your suite of documentation is in order and subject to you meeting all necessary lending criteria, your loan will be approved.
What insurance will I need before I receive approval?
Accidents happen. So, in order to be prepared all lenders will require you to have adequate insurance to cover you as an owner-builder in case anything goes wrong during the construction period.
The exact insurance you’ll be required to take out varies from lender to lender, but the most common types of insurance are:
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Construction Works aka Contract Works: This covers any damage to the site or property that occurs during the build, including theft of materials and vandalism. It also protects you in case a natural disaster such as a bushfire or cyclone destroys your partially-built home.
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Domestic/Home Warranty: If you are using another builder rather than building yourself, this insurance will protect you if your builder doesn’t complete the project on time, is late to complete a stage deadline or goes bankrupt during construction. It also covers you for serious structural defects and for legal fees which may be incurred if a court case results. Fingers crossed you avoid going down that rabbit hole.
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Public Liability: As you’re responsible for everything that happens on your building site, public liability insurance will protect you if workers are injured during construction, or if your neighbour’s property is damaged during the building process.
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Personal Accident/Injury: This should cover you and your family in case you’re injured whilst visiting or inspecting your house as it’s being built. Some personal accident insurance contracts specify that anyone on the building site must wear personal protection equipment, so check what the requirements are in your policy.
Pros and cons of owner builder construction loans
Pros
- Due to the make up of owner builder construction loans, the loan ensures that builders and contractors are only being paid for completed work, not for work that is yet-to-be completed.
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As you are only charged interest on the loan amount used per stage and not principal and interest this can ease cost burdens while constructing the home.
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You get to watch your dream home unfold, before your very eyes and can sit back at the end of the day and say ‘Hey, I built that’.
Cons
- The amount of paperwork and hurdles you may face can leave you wanting to pull out your hair. Approval for a construction loan a significant amount of work beforehand, and (if you're not building the home yourself) a long conversation with your builder.
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The deposit needed for owner builder construction loans can be significantly higher than a standard mortgage if you are applying as an owner-builder.
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The interest rate on owner builder construction loans is generally higher than those of regular mortgage loans as the lender assumes more risk.
Savings.com.au’s two cents
When it comes to building your dream home, there’s more than one option available. You could elect to buy a house and land package, buy land and engage a registered builder, or complete the build yourself as an owner-builder.
If you’re set on taking on the brunt of the workload and watching your new build unfold right before your very eyes, considering your timeline and budget is key you to determining size, structural elements and materials.
Donning your hard yellow hat and becoming an owner-builder could mean some significant financial savings, yet to complete such a mammoth workload (including paperwork) requires skill and experience - something you should really only consider if you have prior experience in building or project management.
Image by Annie Gray via Unsplash.
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