One of the big challenges during home construction, particularly building your first home, is dealing with all of the costs associated. Sure, saving for a deposit is tough. In Brisbane for example, in this lending climate, you really need at least $20,000 saved up before you would even think about buying a home.
Once the deposit and all those costs are paid, there is a number of other costs you need to be aware of. The main one of these is the mortgage interest payments made during construction. These can be particularly taxing financially if you are paying rent during construction.
For those of you that aren’t aware, you are required to pay IO (interest only) mortgage repayments on your mortgage during construction, from settlement on the land through to handover. These repayments are based on the money that has been drawn out of the mortgage and increase as you make your progress claims.
Just as a loose example, lets say you borrow $400,000 from the bank. $180,000 for the land and $220,000 for the build.
Month 1 and 2 – 3.69% on $180,000 for land + $11,000 build deposit = $191,000 x 3.69% = $7050 approx per year = $590 approx for monthly payment.
Month 3 – add in the slab payment and you go to $690 for the month
Month 4 brings the frame stage which bumps it to $835 this month
Month 5 enclosed stage and we have done 65% of build cost so $995pm
Month 6 fixing stage so 85% total so $1130 per month
Month 7 is handover so you are now moved in and onto your P&I payments
That brings us a total of about $4830 during construction, over roughly 16 weeks. Mortgage payments are due the following month so that allows for a 16-17 week build.
Over the course of the build, it is about $300pw on average for interest payments. So how do we plan for this?
Well, you have approximately 2 weeks between finance approval and up to 6 weeks extra for pre construction before commencement, and then a 16 week approximate build time – so lets say 24 weeks in total.
If you put away $200 per week over that time it leaves you with $4800, almost exactly the same amount as the total of interest payments. Of course if the builder manages to build faster then you get to keep some – but you should do this exercise based on your maximum build time based on the contract.
Sometimes, builders may complete more than one stage in a month or might go a whole month without completing one – it is rarely as neat as the above but it gives you a decent idea of the costs involved.
Many people opt to move in with family or friends in order to ease the financial burden, but that’s not always possible so you need to be prepared. I also stress this is a very loose calculation and should not be relied on for budgeting or accuracy.
For more information about anything in the article, contact Equity Build Homes or your local bank or broker.