How much deposit do you need for a knock down rebuild?

Take the on-completion valuation, which is the valuer's figure for the finished home. Multiply by 80%. That is the most a mainstream lender will advance without LMI. Subtract the build contract price and any approved extras, and what is left is the maximum existing mortgage the lender can carry into the loan. If you owe less than that, your equity covers the deposit and no cash is needed.

Say the finished home will value at $1,500,000 and the build costs $700,000. Eighty per cent of $1,500,000 is $1,200,000. Less $700,000 for the build leaves $500,000 of room for existing debt. If you owe $400,000, you are inside the line with $100,000 spare. If you owe $600,000, you are $100,000 over and need cash, LMI or a cheaper build.

Even when the equity covers the deposit, there are costs lenders will not fund. Demolition and site clearing are commonly excluded. Rent for the twelve to eighteen months of the build is your cost. Council fees, soil tests, surveys and design fees are usually paid before the contract is signed. And every specialist will tell you to hold a contingency of five to ten per cent of the contract for variations, because almost every build has them.

If the total loan exceeds 80% of the lower of cost or on-completion value, LMI is charged on the peak loan amount, not on the drawn balance. On a $1,200,000 loan at 90% that can be a five figure premium, usually capitalised into the loan. Fewer lenders go above 80% on construction, and those that do tend to want a strong income position and a mainstream builder.