Do I need to pay out my existing mortgage for a knock down rebuild?
What actually happens to the old loan
A construction lender needs a first mortgage over the land. If your existing loan is with another lender, the new lender pays it out at settlement and takes over the security. If it is with the same lender, the loan is varied or replaced. Either way the amount you owed does not disappear; it becomes the starting balance of the construction loan.
For example, if you owe $450,000 on a house the valuer says is worth $900,000 as land, and your fixed price contract is $650,000, your construction loan needs to be $1,100,000. The lender checks that against the on-completion value and your income before approving.
When it becomes a problem
The existing debt is only a problem if it pushes the total loan above what the lender will lend against the finished home, or above what you can service. A large existing mortgage plus a large build can exceed 80% of the on-completion value, which means LMI or a lower build budget.
The other issue is fixed rates. If your current loan is fixed, refinancing it triggers break costs. Some lenders can leave the fixed portion in place and add the construction funds as a separate split, which avoids the break cost, but only if the construction loan is with the same lender.
Using existing equity as the deposit
Most people funding a knock down rebuild do not have a cash deposit sitting aside; their deposit is the equity in the land. If the land is worth $900,000 and you owe $450,000, you have $450,000 of equity, which is usually more than enough to keep the total loan under 80% of the finished value. That is why long-held homes in established suburbs are the classic knock down rebuild candidates.
Not sure which lender fits your situation?
Get help with knock down rebuild finance
A knock down rebuild is a construction loan wrapped around an existing mortgage, so lender choice, valuation approach and progress payment handling matter more than the headline rate. We connect you with a finance specialist who handles knock down rebuild deals.
Property Finance Help connects users with finance professionals who can help review the finance pathway for the property, loan purpose and lender policy fit.
Property Finance Help is a lead generation service, not a lender, broker, or financial adviser. All information on this website is general in nature and does not take into account your personal objectives, financial situation, or needs. Consider seeking independent professional advice before making any financial decision.
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