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Jaimin Yadav, director of Finedge Finance, has observed a worrying trend among borrowers who wish to undertake end-to-end property builds.
“I’m seeing more and more borrowers who are struggling to get the finance they need to complete an entire home building project – from purchasing the land to constructing the home – and I’ve heard similar stories from other mortgage brokers,” he said.
Yadav said that rising land prices and escalating building costs mean consumers must borrow more to fund their projects. Unfortunately, borrowing capacities have not risen in tandem with these expenses.
“The average person’s borrowing capacity has fallen over the past couple of years due to a combination of significantly higher interest rates and cost of living,” he said.
It’s true that borrowing capacities have improved a little over the past few months, due partly to the stage 3 tax cuts and partly due to more relaxed credit criteria with some of the lenders.
“However, this increase has not been enough to cover the increase in land prices and construction costs,” he said.
With mainstream banks tightening their lending criteria, many borrowers are being pushed towards alternative financing options.
“Borrowers who can’t get finance from mainstream banks are being forced to consider non-bank lenders and private lenders,” Yadav said.
“Unfortunately, though, there aren’t many lenders that are willing to finance end-to-end property builds; and those that are willing are often demanding deposits of as much as 20–30 per cent for the whole project or up to 50 per cent for land only.”
This challenging financing landscape has led many potential builders to opt for established properties instead. According to Yadav, second-tier and third-tier lenders are more willing to finance these types of purchases, typically requiring only a 20 per cent deposit.
“Some consumers are deciding that if they can’t build their dream home from scratch, they’d rather buy an established property, because it’s simpler, faster and, from a lending perspective, cheaper, and not running too many risks on valuations,” he said.
“That’s reducing demand for new builds, at the very time the federal government is trying to increase housing construction.”
Looking ahead, Yadav said that the situation for borrowers may improve only with a substantial increase in borrowing capacities.
“It’s possible conditions will be different in 2025, if interest rates, property prices and inflation all decline, as that will increase the average person’s borrowing capacity,” he said.
“In that case, we expect, it’s likely that more people would be able to fund new builds through mainstream banks, which would steer some people from the established to the new property market and give the home building sector a bit of a boost.”
[RELATED: Trends impacting the mortgage industry]
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