Money talk
How to finance a knockdown rebuild
Knocking down an existing home and rebuilding from scratch is a great way to get your dream home in your ideal location. But how do you finance a knockdown rebuild?
To help you understand how to finance a knockdown rebuild, we’re delighted to bring you the expertise of Mark Kevin, Managing Director for MAB Sydney. An award-winning mortgage broking firm, MAB (Mortgage Advice Bureau) are renowned for their expertise in construction and development finance.
“Financing a knockdown rebuild is different from a traditional home loan and typically requires a construction loan,” says Mark. “You can also use equity in an existing property, government grants and may need a bridging loan.”
Let’s look at finance for knockdown rebuild projects in more detail.
Browse our other knockdown rebuild (KDR) articles:
A complete guide
How much will a KDR cost?
Construction loans overview
A construction loan is ideal for your knockdown rebuild project because, instead of owing the full amount from the outset, the loan is staged according to building milestone dates. Mark Kevin from MAB explains: “Unlike a standard home loan, where the full amount is provided upfront, a construction loan is drawn down in stages, aligning with key milestones in the rebuild process.”
Those milestones are usually marked by:
- The demolition is done
- The slab has been laid
- The frame is complete
- The house has reached lock-up stage
- Your new home is complete
Managing your finances through these stages is helped by the fact that construction loans are often interest-only for the first 12 months (or until the project is complete, if this happens first).
Construction loan paperwork
All home loans require lenders to assess the value of the home and the homebuyer’s ability to take on the mortgage. Because of their additional stages and greater complexity, knockdown rebuild projects require even more lender vigilance.
“Compared to a standard home loan, a knockdown rebuild loan involves more lender scrutiny, additional paperwork, and staged funding,” says Mark.
- Valuation: The bank will assess the post-construction value (also known as the ‘as if complete’ value of the property to ensure the loan amount is justified.
- Construction contract and plans: Lenders will ask to see a fixed-price building contract, council approvals and detailed plans from a licensed builder.
- Deposit & Loan-to-Value Ratio (LVR): Most lenders require at least a 10-20% deposit or existing equity in the property. Higher LVRs may require Lenders Mortgage Insurance (LMI).
- Existing mortgage (if applicable): If there is an existing mortgage, lenders will evaluate your ability to service both the loan and the new build.
- Cost buffer: Many banks require proof of additional savings to cover unexpected cost overruns.
- Builder reputation: It’s essential to choose a reputable builder as lenders will assess whether the builder is financially sound and delivering quality work at a fair price.
- Build quality and compliance: Construction must meet industry standards, including structural integrity and essential fittings (or you must demonstrate you have the financial capacity to cover these expenses).
More about the idea of an ‘As If Complete’ value
When you’re buying a regular home, the house is there for you and the lender to see and value. “For a traditional home loan, lenders conduct a standard valuation to confirm the purchase price and structural integrity of the property,” explains Mark from MAB (Mortgage Advice Bureau).
When it comes to a knockdown rebuild however, your dream home is only visible in your mind and on paper. “So, lenders use a specialised construction valuation report to determine the "as if complete" value,” says Mark. “This essentially ensures the construction costs are accurate and within standard industry pricing.”
Different scenarios
Just like no two homes are the same, no two homebuyers are the same. Here’s Mark from MAB’s guidance on different scenarios that might be relevant to you:
You have a mortgage on the house that will be knocked down:
“Most lenders allow you to refinance your existing mortgage into the new construction loan, combining both amounts into a single facility,” says Mark. “This simplifies repayments, ensuring you manage just one loan rather than multiple accounts.”
You’re buying a house now with the intent to knock it down and rebuild later:
Mark says that you can purchase the property in its current state with a traditional home loan. “Then, when you proceed with a knockdown rebuild, the lender will evaluate both the land value and construction costs to determine the "as if complete" value of the finished home,” he says.
You may then end up with a loan that is structured in two parts:
- Land Loan: Funding for the initial purchase of the property.
- Construction Loan: Released in stages as the build progresses.
You’ve paid off the home you’re going to knock down:
Mark says you have two options in this scenario. “You may have the option to use the equity in your land as security for a construction loan, which can help avoid Lenders Mortgage Insurance (LMI) and reduce the need for a large deposit,” he says. “Alternatively, you could release the full equity in cash to self-fund the build, giving you greater control over payments without the bank managing the process.”
You’re knocking down a house with plans to subdivide or build two homes on the block:
“This is considered development finance, which has stricter lending criteria,” outlines Mark from MAB. “Some lenders will require a larger deposit, higher interest rates, and proof of serviceability for both properties, though they could allow the rental income to be used to service the loan, allowing easier approvals for the application.”
Tips for getting ready for your knockdown rebuild financing
We won’t shy away from letting you know that arranging and attending to the finances of a knockdown rebuild can be more detailed and time-consuming than a regular home loan.
Lenders are generally more cautious with construction lending due to the complexity and risks involved,” explains Mark. “When planning a knockdown rebuild, it is important to be prepared for the unique financial and logistical challenges involved.”
Here are key tips from MAB for ensuring a smooth process:
- Understand loan structuring: Understanding how construction loans work is critical in having the peace of mind required when building your dream home.
- Have a contingency fund: Costs can escalate during a build, so having extra funds available is crucial.
- Check if you’re eligible for a government grant: These change regularly so check your state to see if you’re eligible for a First Home Owner Grant and any stamp duty concessions for new builds.
- Stay on top of approvals: Council approvals and lender requirements can delay the process if not handled early.
- Work with an experienced broker: Speak to a broker who specialises in construction lending/finance.
Mortgage Advice Bureau and Rawson Homes: A perfect partnership for knockdown rebuild projects
In partnership with Rawson Homes, Mortgage Advice Bureau (MAB) provides a seamless experience that combines both finance and construction. MAB is an award-winning mortgage broking firm that has a dedicated construction team that handles the process from start to finish, including access to specialist lenders not available to the public.
“Rawson focuses on designing and building dream homes while we take care of the financial side,” is how MAB’s Mark Kevin neatly summarises the partnership. “MAB works with leading lenders to provide tailored financing solutions for knockdown rebuilds, ensuring a smooth and stress-free experience.”
MAB’s services include:
- Specialist construction loans tailored to your build
- Equity release and refinancing strategies for existing homeowners
- Pre-approval guidance to ensure you are financially prepared
- Government grant assistance to maximise financial benefits
- Construction planning and feasibility studies to ensure the value of your build aligns with market standards.
The partnership between MAB and Rawson benefits you by offering access to:
- Integrated support: MAB and Rawson understand each others’ processes, making for a smoother overall process for you.
- Exclusive loan solutions: MAB offers access to competitive lending options that are specifically tailored to Rawson clients.
- End-to-end guidance: Together, we’ll manage the whole process, from pre-approval to final settlement.
Having the right Mortgage Broker early in the process can make a huge difference in securing finance, avoiding delays, and maximising loan benefits.
Together, we make knockdown rebuilds simple, streamlined, and achievable,” says MAB’s Sydney Managing Director, Mark Kevin.
Are you considering a knockdown rebuild and are keen on support with your finances? Don’t hesitate to get in touch with MAB.
FAQs
How much does a knockdown rebuild cost?
A knockdown rebuild project includes multiple stages, each with their own costs. First, there’s choosing your new home design and getting all approvals. Next, there’s the demolition process. Then, finally and most excitingly, building. A good knockdown rebuild specialist builder, like Rawson Homes, will work with you to ensure you have a full understanding of the costs involved in each step of the way to your dream home.
Can you demolish a house with a mortgage on it in Australia?
If you have a standard-style home loan mortgage and are considering knocking down that house to rebuild a new home, you’ll need to speak with your lender. They’ll likely help you to refinance with a construction loan, which takes account of the different risks and timelines involved with a knockdown rebuild project.
