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SITE COSTS EXPLAINED
When building with us, we will always be transparent about your site costs if you opt for a non-fixed price contract. Here we give you an insight on how site costs are calculated, why they vary and what they are.
What are site costs?
To prepare a site for construction, there are two key areas of preparation that attribute to overall site costs:
1. Site infrastructure
These are mandatory items we require in order to commence work on your site, these include, but are not limited to, building permit and fees, contour and soil test reports, builder’s construction and warranty insurance and temporary security fencing. A full list of these costs are provided in our initial quote.
2. Site works
These costs are incurred as a result of actual works needed to prepare your site for construction. Costs can vary and will be determined after various tests are conducted on your site. For example, cost variations can occur due to:
- A slab upgrade as a result of soil conditions, fall and fill.
- A requirement for retaining walls.
- Additional fill.
- Excess soil removal.
- Rock removal.
- Instalment of services if needed (eg gas, water).
- New estate covenants.
Why do site costs vary?
Site costs can vary depending on the type of soil, extent of engineered fill and slope on your block. They type of soil and slope determine how your house must be built. For example, the key reason for soil testing is to establish how likely it is that the soil will move, expand and contract with different levels of moisture content.
We organise for an engineer to conduct a soil and contour test to establish the best type of foundation to suit the soil and slope (if any).
How are site costs calculated?
Your site costs will be calculated based on specific attributes your block displays. For example, the more problematic the soil and larger the slope will add additional costs due to increased levels of site preparation required.
As a guide, here is a list of soil classifications according to Australian Standard AS 2870/2011 – Residential slabs and footings.
Site classifications and movement based on soil reactivity
|A||Stable, non-reactive. Most sand and rock sites with little or no ground movement likely from moisture changes.|
|S||Slightly reactive clay sites with only slight ground movement from moisture changes.|
|M||Moderately reactive clay or silt sites, which can experience moderate ground movements from moisture changes.|
|H||Highly reactive clay sites, which can experience high ground movement from moisture changes.|
|E||Extremely reactive site, which may experience extreme amounts of ground movement from moisture changes.|
|P||Problem sites which include soft soils, such as soft clay or silt or loose sands; landslip; mine subsidence; collapsing soils; soils subject to erosion; reactive sites subject to abnormal moisture conditions or sites which cannot be classified otherwise. The ability of the soil to evenly bear a load is very poor and ground movement from moisture changes may be very severe.|
What Are Property Valuations and How Do They Work
Before buying a house, you have to know the value it has on the current market. Naturally, you could value your property yourself – but you may take more things into account when doing so, such as emotional value. Thus, you can come up with a higher value.
A proper valuation comes in the form of a detailed report, made by an expert. As the name implies, it shows the property’s exact market value. The International Valuation Standards Council defines the property market value as the estimated sale price between a willing seller and a willing buyer in a transaction.
This price is determined after proper marketing and after both parties had acted prudently, knowledgeably, and without compulsion.
Therefore, it is safe to say that property valuation implies more than just a couple of things. After all, the seller wants to get a proper amount on his sale, while the buyer has to feel comfortable with the price proposal.
As mentioned above, you will want an independent view of your property’s market value. Obviously, this means hiring a qualified valuer. This ensures that you will get your property properly assessed and be presented with a value you are likely to be happy with.
Naturally, these qualified valuers will have to take a lot of things into consideration when assessing your property’s value. Basically, their job is to estimate the price that you could get if your property is given reasonable marketing and is meant to be sold within 90 days.
When a property is valued, a valuer will consider both intangible and tangible aspects.
An external and internal inspection of your property will mark the start of full and comprehensive valuation. The valuer will usually take around 48 hours to come up with a three-page report about your property’s value.
Costs will vary depending on the report format that you request and the property’s type – for example, the valuation of an average-sized property usually costs around $300.
What Will Valuers Look At?
Property valuers have to take more than just the property itself into consideration. Your property may be in perfect condition, but the simple fact that it is rather far away from public transport may lower its overall value.
Here is what valuers will look at and consider when valuing your property:
- Architectural Style
- Topography, Aspect, as well as the Layout of the Block
- Land Size
- Size and Layout of the Residence
- Development and/or Renovation Potential
- Number of Rooms – bathrooms, bedrooms, and the size of the kitchen
- Location in Relation to Shops, Amenities, Public Transport, and Schools
In addition to all of the above, valuers will also make use of two main methods in order to value your property. Namely, the summation and the direct comparison method.
The Summation Method
This method implies the adding of the land’s value to the value of the improvements that can be found on the land, such as the house, garage, pool, and so on. When it comes to the land value, things like shape, size, topography, location, amendments, and surrounding infrastructure will be taken into account.
On the other hand, improvements are valued considering their style, age, room number, architectural features, overall appearance, and possible renovations.
The Direct Comparison Method
For the direct comparison method, the valuer will look at recent sales of similar properties – within the last six months – then compare and contrast those properties with your property.
The comparison of properties acts here as a valuation guide. By doing so, the valuer compares two or more properties similar to your own and make adjustments if required. For any difference between a certain property and your own, the valuer will adjust the overall market value of your property.
How Are These Methods Used?
Professionals will usually combine the two mentioned methods in order to determine a so-called valuation range. Then, to come up with a proper valuation figure, they will rely on their skills and experience in the field.
This is why you should take your time when choosing a qualified valuer.
Three Different Types Of Valuations Banks Use
A full valuation is the most common and comprehensive type of valuation available. This is commonly used when a loan has a higher Loan to Value Ratio (LVR) and is almost always used when this is above 80% as Lenders Mortgage Insurance (LMI) is involved, deeming the transaction risky. A full valuation sees the valuer going out to the property to physically inspect the property inside and out.
A kerbside valuation involves an inspection from outside the property without the need of physically having to enter the property. The valuer will use this together with online information and comparable sales data to determine the property’s value. This is commonly used when the transaction/loan is seen to be at low to medium risk.
For a desktop valuation, the bank or valuer will usually only refer to online data available and comparable sales. This type of valuation is for low risk transactions with a low LVR.
HOW DO PAYMENTS DURING CONSTRUCTION WORK?
If you’re building your home with First Home Hero, you will likely need a construction loan. Here’s a general overview of how they work and what to look for.
What is a construction home loan?
A construction home loan is a type of home loan designed for people who are building a home, as opposed to buying an established property. It has a different loan structure to home loans designed for people buying an existing home.
A construction loan most commonly has a progressive drawdown. That is, you receive instalments of the loan amount at various stages of construction, rather than receiving it all at once at the start. You generally only pay interest on the amount that is drawn down, as opposed to on the whole loan amount.
A number of lenders offer construction loans that are interest-only during the construction period and then revert to a standard principal and interest loan.
Of course, a construction loan is just one potential source of funding for your project. The Federal Government recently unveiled its HomeBuilder scheme, which will give eligible homebuyers and existing owners grants of $25,000 to help them construct or substantially renovate their home. Strict eligibility criteria apply– for example, you’ll need to meet an income test, and be building a new home that’s worth less than $750,000 or a renovation that will cost at least $150,000.
How do progress payments work?
Once a construction loan has been approved and the property is being built, lenders will generally make progress payments throughout the various stages of construction. Progress payments will typically be paid directly to the builder at the completion of each stage.
(1) Slab down or base: This is an amount to help you lay the foundation of your property. It can cover the levelling of the ground, as well as the plumbing and waterproofing of your foundation.
(2) Frame stage: This is an amount to help you build the frame of your property. It can cover partial brickwork, the roofing, trusses and windows.
(3) Lockup: This is an amount to help you put up the external walls, and put in windows and doors (hence the term ‘lockup’, to make sure your house is lockable).
(4) Fitout or fixing: This is an amount to help you install the internal fittings and fixtures of your property. It can cover plasterboards, the part-installation of cupboards and benches, plumbing, electricity and gutters.
(5) Completion: This is an amount for the conclusion of contracted items (such as final payments for builders and equipment), as well as any finishing touches such as plumbing, electricity, and overall cleaning.
As construction loans are progressively drawn down, interest is normally calculated based only on the funds used so far. For example, if by the third progress payment, only $150,000 has been drawn down on a $300,000 loan, interest would only be charged on $150,000.
Can you use a ‘standard’ home loan instead of a construction loan?
If you are not a First Home Buyer, you may be able to use a standard home loan if you have positive equity (meaning your property is worth more than you owe on it) in an existing standard home loan. You’ll most likely need to have enough equity to be able to borrow the amount that you need without using your to-be-constructed house as security.
Additionally, if you have enough equity in a loan on the block of land itself, or in other assets such as investment properties, then you may be able to borrow the funds for your construction, whether progressively or all at once.
You can also consider refinancing a construction loan into a standard home loan once
your home is fully built. You may be able to find a lower rate by comparing your options.
How to get a construction loan
Getting approved for a construction loan is a different process to applying for a standard home loan on an existing home.
You’ll typically need to provide the lender with documents including council plans and permits, a copy of your fixed-price building contract and any applicable insurance (such as public liability insurance and builder’s all risk insurance). You’ll also be subject to normal lending criteria, so will most likely need to provide details of your income and expenses.
A property appraiser will then typically estimate the expected value of the property when completed. This is because when you apply for a construction loan, the lender may consider the expected value of the property upon completion of construction, as well as the total amount required to borrow in order to pay the builder. The lender will typically also require further valuations and inspections during the project.
When your loan is approved, your lender will give you a loan offer. You will then have to make a deposit, as you would with most other types of home loans. This acts as a security at this stage of construction. A larger deposit can help to convince your lender that you are a less risky borrower. You’ll typically need at least a 5% deposit, keeping in mind that you may have to pay lender’s mortgage insurance if your deposit is less than 20%.
For each stage of the construction process, you’ll usually have to confirm that the work has been done, complete and sign a drawdown request form, and send it to the construction department of your lender.
Your lender may also request an invoice from us for the cost of the work done.
UNDERSTANDING LENDERS MORTGAGE INSURANCE
Buying a property without a chunky deposit could see you whacked with the oft-dreaded cost of lenders mortgage insurance. But in a different sense, the time it takes to save up the deposit could also cost you.
- What is lenders mortgage insurance?
- How does lenders mortgage insurance work?
- How to avoid paying it?
- How is LMI paid?
- Costs of LMI
- Can you get a refund of LMI?
While some say good things come to those who wait, others say the early bird catches the worm.
In the context of buying property in Australia, those who wait to buy property until they’ve saved up a sizeable deposit can save money by not having to pay for lenders mortgage insurance (LMI). But the early birds who buy property sooner after saving the bare minimum 5% deposit have the opportunity to catch their dream house before prices rise, and potentially build a capital gain as their property value increases in a rising market.
These early birds will probably have to pay for lenders mortgage insurance, but perhaps this cost is worth it? Statistics suggest many borrowers might think so, since around one-quarter of Australian housing loans are estimated to be covered by LMI (according to the RBA).
Or maybe many of these borrowers don’t understand what lenders mortgage insurance actually is? In 2016, Banking Analyst Martin North from Digital Finance Analytics told ABC News that around 70% of households think lenders mortgage insurance covers them, which is incorrect.
So this begs the question…
What is lenders mortgage insurance?
Lenders mortgage insurance (LMI for short) is an insurance policy which covers the mortgage lender against the losses they may incur in the event that the borrower can no longer pay loan repayments (an event known as a ‘default’ on the home loan).
LMI is not to be confused with mortgage protection insurance, which covers borrowers for their mortgage in case of death, sickness, disability, or unemployment.
How does lenders mortgage insurance work?
In a nutshell, if a borrower defaults on their mortgage, the lender can recover what is owed to them by repossessing the property which the home loan is tied to. But if the property’s value has fallen, the lender can suffer a loss. This is the risk which LMI covers. With this risk of loss passed on to the lenders mortgage insurer, lenders are more willing to approve loans at a higher loan-to-value ratio (LVR), often up to a maximum of 95% of the property’s value or sale price (whichever is lower).
The introduction of lenders mortgage insurance to Australia in 1965 thus created more opportunities for people to get a home loan and also encouraged lenders to charge lower interest rates. The two largest providers of LMI in Australia are:
- Genworth Financial
The lender decides which LMI provider to go with – the borrower has no choice in the matter.
While LMI only covers the lender, it is usually the borrower, not the lender, who has to pay for it. For many, paying for an insurance policy that only covers a financial institution seems like the worst form of charity. So what does it take to avoid it?
How to avoid lenders mortgage insurance
Typically, lenders exempt borrowers from having to pay for lenders mortgage insurance if the deposit on the property is over 20% (80% LVR) of the property’s value or sale price (whichever is lower). This is because lenders perceive borrowers with deposits over 20% as less likely to default on a loan. Also, a 20% deposit is viewed as a large enough buffer to protect lenders from a fall in the value of the property – giving them a strong chance of recovering the amount that’s owed to them if the borrower defaults.
Some circumstances may require a larger deposit though. In specific suburbs that a lender perceives as having high default rates and/or at risk of a large fall in prices (eg. like what was seen in some of the regional mining towns when the capital infrastructure boom ended), the lender may require a bigger deposit (such as 30%) for the borrower to be exempt from LMI.
Other ways of avoiding lenders mortgage insurance
Borrowers can be exempt from having to pay LMI for other reasons, such as:
- Having a guarantor: Many lenders will waive LMI on the loan (no matter how small the deposit) if the borrower is backed by a quality guarantor (such as a parent) that legally accepts responsibility for the mortgage repayments if the borrower cannot make them.
- Working in a highly-regarded profession: Borrowers working in specific professions that are considered to be highly paid and relatively stable can sometimes borrow up to 90% LVR without having to pay LVR. Such professions can include:
- Doctors (GPs, dentists, optometrists, GPs)
- Accountants (e.g. actuaries, CFOs, auditors)
- Lawyers (e.g. solicitors, judges, barristers)
Sometimes a combination of other factors can also see LMI waived on the home loan, such having a perfect credit history and requesting a modest loan amount for property in a low-risk suburb.
Is LMI added to the loan?
The lenders mortgage insurance premium can be paid as an upfront one-off payment at settlement or can be capitalised into the loan (added to the loan amount) and gradually paid off in the regular mortgage repayments.
This means the premium will accrue interest though, costing you more over the long term.
How much is lenders mortgage insurance?
The upfront cost of LMI premiums typically varies by the size of the loan and the LVR, as illustrated below. They can also depend on what type of borrower you are. For instance, first-time borrowers often pay a higher LMI premium than existing borrowers, even at the same LVR and loan size.
Source: Genworth LMI premium estimator. Prices including GST but excluding stamp duty. Based on a loan term up to 30 years
|Estimated property value||95% LVR||90% LVR||85% LVR|
Can you get a refund of lenders mortgage insurance premiums?
When you refinance to a different lender or buy a new house, it’s unlikely that you’ll get this premium back. You may even have to pay for LMI again if your LVR is still above 80%.
However, in cases where the loan is terminated early (i.e. in the first two years), you may be eligible for a partial refund of LMI premiums. Qualifying for an LMI refund also depends on the lender’s LMI policy provider and meeting certain criteria, so it’s worth checking with your lender to see if you’re eligible.
WHAT IS A FIXED PRICE CONTRACT?
What ia a fixed-price contract?
Fixed-price contracts are the most common form of domestic building agreement which means the builder agrees to perform building work for a fixed sum.
The basics of a fixed price contract
A fixed price contract is the agreement that the price presented will remain the same from the start to the finish of the project.
Can you explain what the Preliminary Process and Preliminary Testing include
The preliminary process involves a 4 Step process:
- Sit down and go through all of our inclusions with your new home sales consultant.
- Complete an onsite evaluation of your block.
- Complete a quotation and attend a quote presentation to go through what your price includes.
- A preliminary agreement is signed and a deposit is taken.
We then complete a site classification, council pre-check, Preliminary Designs and Site Plan. This is all information the bank requires in order to finalise your approval and for us to complete a fixed price contract for you.
If there will be any additional expenses, what may these include?
The only way that your price can go up, is if YOU upgrade something or YOU change something during the build.
Does a fixed price contract allow for variations to the building work during the construction process?
Absolutely! As per your contract you can make changes during the build.
Can all estimates or “provisional sums” for items such as sitework be determined exactly at the time of signing a fixed price contract?
Yes! Fixed price contracts don’t estimate and add varying cost later – Correct pricing throughout the preliminary period keeps your budget on track!
Am I locked in to anything when signing a Preliminary Agreement?
No – this allows us to ensure that everything you want is within budget and on track – we don’t want any nasty surprises during the build so we do our homework first.
INSURANCE QUOTE & PDS
For further information, please speak with your Austwide Invest accredited Consultant.