Borrowers struggling to fnance homebuilding projects: broker

The federal government’s plan to facilitate the building of 1.2 million homes in the fve years from July 2024 is facing several well-publicised obstacles, including red tape, rising building costs and a shortage of skilled tradespeople. But there’s another obstacle that has received little publicity – the increased diffculty for consumers to fnance end-to-end property builds.

Finedge Finance director Jaimin Yadav said an increasing number of people who wanted to buy land and build a property were instead having to settle either for the purchase of a home that had just been built or an established property.

“I’m seeing more and more borrowers who are struggling to get the fnance they need to complete an entire homebuilding project – from purchasing the land to constructing the home – and I’ve heard similar stories from other mortgage brokers,” he said.

“Land prices have been rising and building costs have been rising, which means consumers are having to borrow more money to fund their project. Unfortunately, though, borrowing capacities have not been rising as fast.

“The average person’s borrowing capacity has fallen over the past couple of years due to a combination of signifcantly higher interest rates and cost of living. It’s true that borrowing capacities have improved a little over the past few months, due partly to the stage three 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.”

Mr Yadav said borrowers who were unable to get bank loans to fund land purchases and homebuilding projects were turning to alternative lenders.

“Borrowers who can’t get fnance from mainstream banks are being forced to consider non-bank lenders and private lenders. Unfortunately, though, there aren’t many lenders that are willing to fnance end-to-end property builds; and those that are willing are often demanding deposits of as much as 20% to 30% for the whole project or up to 50% for land only,” he said.

“As a result, quite a lot of these borrowers are deciding to buy an established property.

There are more secondtier and third-tier lenders willing to fnance that kind of purchase; and they’re often willing to accept just a 20% 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 much risks on valuations. That’s reducing demand for new builds, at the very time the federal government is trying to increase housing construction.”

Mr Yadav said the situation would improve only with a signifcant increase in borrowing capacities.

“It’s possible conditions will be different in 2025, if interest rates, property prices and infation 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 homebuilding sector a bit of a boost.”