Owner builder vs licensed builder: how the finance differs

A fixed price contract that defines the cost. A progress payment schedule set by state law. A licensed builder with statutory obligations to complete and rectify. Home warranty insurance that pays for completion if the builder dies, disappears or becomes insolvent. A valuation the valuer can rely on because the specification is contractual. All of that is why construction lending to licensed builds is a mainstream product.

An estimate, a permit, a program and your word. The lender compensates with a lower LVR, higher contingency, more inspections and sometimes a requirement that a licensed builder supervise the structural stages. Some lenders only fund owner builders who hold a trade licence. The result is that owner builder finance costs more per dollar and provides fewer dollars.

Owner building typically saves the builder's margin of 15 to 25 per cent of construction cost. Against that, the lender advances 10 to 20 per cent less of the project, so you need more cash or equity. Rates are often higher. And the risk of a cost overrun or a stalled build is yours; a licensed builder who quotes $500,000 has to deliver at $500,000, an owner builder who estimates $500,000 pays whatever it costs. For a tradesperson with time and skills, owner building is often worth it. For an office worker with a spreadsheet, the margin saved is frequently spent on overruns and delay.

Engage a licensed builder for the structural stages, slab to lock-up, on a fixed price contract, and finish the fit-out yourself. Lenders treat the structural contract as a standard construction loan and the finishing stages as owner builder work, often at a blended LVR, and the warranty cover applies to the builder's work. It captures much of the saving without the full finance penalty.