Knock-Down Rebuild Finance: How Lenders Value a House You’re About to Demolish
Key Takeaways Across much of Sydney, the land under an older house is now worth far more than the house standing on it. That is why so many owners weigh up a knock-down rebuild (KDR). They keep the block in the street they already like and replace a tired dwelling with a home built for how they actually live. Knock-down rebuild finance does not behave like a renovation loan or a standard construction loan on a vacant block. You start with a mortgaged house, deliberately destroy the thing the bank holds as security, then ask a lender to fund a build on what is now bare land. Working out how a construction loan broker structures the deal before you sign a demolition contract can save an expensive mid-project surprise, because the numbers have to hold at every stage. Why Demolition Changes How Lenders See Your Property Once the bulldozer finishes, your property is vacant land, and that single moment drives everything about knock-down rebuild finance. A lender’s security is whatever it could sell if the loan went wrong, so from that day the old house counts for nothing. Lenders do not assess a KDR against what your home is worth today. The valuer instead gives an on-completion valuation, which is what the property should be worth once the new home is finished, based on the land value plus the fixed-price building contract. The lender applies its maximum Loan to Value Ratio (LVR), the loan as a percentage of the property value, to that figure, typically using the lower of the valuation or the land-plus-contract cost. This is also why the equity you think you have can shrink. If your home is worth $1.6 million standing but the land alone is worth $1.2 million, roughly $400,000 of value comes down with the house. Lenders manage that dip by approving the whole package, the old loan payout and the build, before demolition starts, so the figures work at every stage. Sequencing a Knock-Down Rebuild Loan A knock-down rebuild is one finance transaction with several moving parts, and the order they happen in decides whether it holds together. Demolishing before the new loan is approved is where projects come unstuck, because few lenders will touch a half-finished deal. The stages run in this order: Clearing the Existing Mortgage A current loan on the home needs your lender’s consent before demolition. In practice, the existing mortgage is refinanced or restructured into the new construction facility, one loan that pays out the old debt and funds the build. Some borrowers also draw on equity at this point to cover soft costs like design, engineering and approvals, which an equity loan broker can arrange as part of the whole package. Valuing Land and Contract The lender orders a valuation based on your land, the signed fixed-price building contract and the approved plans, and the valuer estimates the on-completion value. Where that figure supports the total lending at the lender’s maximum LVR, often around 80% before Lenders Mortgage Insurance (LMI) is added to protect the lender on higher-LVR loans, the deal proceeds. Some lenders go higher with LMI, though construction policies vary. Funding Demolition and Early Costs Demolition usually sits outside the building contract and is handled by a separate contractor, which is one of the awkward gaps in a KDR budget. Some lenders release funds for it as an early advance once the full package is approved, while others expect you to cover it from savings or pre-arranged equity. The same applies to costs that land before the first progress payment, such as service disconnections and asbestos removal on older Sydney homes. Drawing Progress Payments Once construction starts, the loan is drawn in progress payments, staged advances released as the builder finishes each stage from slab through to completion. You pay interest only on what has been drawn, so repayments start small and grow as the build advances. The lender usually requires evidence at each stage before releasing funds, which stops anyone paying ahead of the work. Numbers Behind a Sydney Knock-Down Rebuild These figures are illustrative, but they show how the maths moves. Say your home is worth around $1.6 million with a $500,000 mortgage, which looks like $1.1 million of equity. The valuer puts the land alone at $1.2 million, so once the house comes down, your equity against the security is $700,000. You sign a fixed-price building contract for $900,000. The lender assesses the on-completion position as land plus contract, $2.1 million. Your total funding need is the $500,000 payout, the $900,000 build and roughly $60,000 for demolition and pre-construction costs, about $1.46 million. Against $2.1 million, that is an LVR of around 70%, comfortably inside most lenders’ standard limits. Two things made this work. The old mortgage was modest against the land value, and the contract price was fixed. Had the existing loan been $900,000, total funding would push toward $1.86 million and an LVR near 89%, the territory where LMI or a budget rethink enters the conversation. Your current mortgage measured against your land value is the first number worth checking on any KDR. Rent and Interest While You Build Most families cannot live on a demolition site, so a knock-down rebuild usually means renting for the 12 months or more the project runs. You then pay rent and interest on the drawn portion of the loan at the same time, and lenders count both when they test serviceability. Banks assess your capacity against a serviceability buffer set by the Australian Prudential Regulation Authority (APRA) at 3 percentage points above the actual rate, and they weigh your rent alongside it. Some non-bank lenders apply their own buffer instead. A household that services the loan comfortably once it is living in the finished home can therefore look tighter on paper while also paying Sydney rent. Most construction facilities allow interest-only repayments during the build, which eases the squeeze. A cash buffer for the overlap, and for the near-inevitable variations and delays,
Cross-Collateralisation: How to Tell If You’re Crossed and How to Unwind It
Key Takeaways Two properties bought through the same bank often end up secured by the same pool. Cross-collateralisation is the term for it, and most borrowers meet the word years later, at the moment they try to sell one property or draw equity out of another and the lender asks to revalue everything they own first. The structure is not automatically harmful. It moves control, and does so at the point where flexibility matters most, when you sell, refinance or fund the next purchase. An arrangement that felt efficient at settlement becomes the thing holding up the next move. Working out whether you are crossed takes a few minutes with your own paperwork. Unwinding it is routine work, and when the aim is to release equity cleanly, comparing how each lender handles discharges and valuations is where an equity loan broker with a wide panel changes the outcome, because policy on release conditions varies more than most borrowers expect. What Cross-Collateralisation Means for Your Titles Cross-collateralisation is a single loan secured by two or more properties. The lender registers a mortgage over each title and treats the group as one pool of security, whether that sits behind a single facility or several. A stand-alone structure works the other way. Each property secures only its own loan. Buying a second property with equity from the first means one loan against the first property covering the deposit and costs, then a separate loan against the new property covering the balance. Same total debt, same two properties, a different legal position. The difference shows up in who decides. Under stand-alone loans, the lender assesses the property in front of it. Under a crossed structure, the lender assesses the pool, so any decision about one property becomes a decision about all of them. How to Tell Whether Your Loans Are Crossed Your own documents answer this, and no phone call to the bank is needed. Five checks cover almost every case: Security Schedule Listing More Than One Address Your loan contract or letter of offer carries a schedule headed Security, Security Property or Collateral. One loan naming two or more addresses is a crossed loan. Each loan naming a single address, with no address appearing against more than one facility, is a stand-alone structure. That one document settles the question for most borrowers, so read it before anything else. All Monies Clause Covering Multiple Titles Mortgage documents commonly secure all monies owed to the lender, which reaches beyond the loan named on the front page. Where that wording sits over more than one title, the properties may be tied together even though each loan looks separate on your statements. A cross-guarantee between related borrowers, common where a trust or company holds one property and you hold the other, can produce the same effect without the word ‘security’ appearing anywhere unusual. Single Facility Replacing Separate Loan Splits Internet banking showing one large loan across two purchases, instead of splits that match what you paid for each property, is a strong signal. Stand-alone lending usually leaves a visible trail, with one account per property plus an equity split where the deposit came from a property you already owned. Purchase Requiring No Cash Deposit Where the bank asked for no cash deposit on your second purchase and created no separate equity loan, the equity was probably absorbed into a combined facility. The missing deposit loan is often the fingerprint of crossing, because the lender widened the security instead of releasing funds to you. Title Search Confirming Registered Mortgages Ambiguous paperwork can be settled with a title search on each property, which lists every registered mortgage and the lender behind it. This matters most where loans have been refinanced, varied or partly discharged over the years, and the original contract no longer reflects the position. A broker can order the searches and read them against your current security schedules. Why Lenders Favour Combined Security More security behind the same debt lowers a lender’s loss position, holds the combined loan to value ratio (LVR) at a comfortable level and makes moving part of your lending to a competitor harder. It also saves work at purchase time, because no separate equity release has to be assessed, documented and settled. None of that is improper. Crossing is often the default when you buy through the bank you already deal with, particularly where nobody asked for anything different. The cost lands later, in what the arrangement does to your options. What a Crossed Structure Costs You The drawbacks surface at the points where you need a lender to move, and they cluster around six situations: Sale Proceeds Directed to Debt Reduction Selling one property from a crossed pool means the lender revalues the remaining security before releasing the title, because what is left must still support what is owed. Where values have softened, part or all of your proceeds may be applied to the remaining loans instead of reaching your account. Under stand-alone loans, only the loan secured by the property being sold has to be repaid at settlement. Partial Discharge Treated as a Credit Decision Releasing one title from a crossed facility is a partial discharge, and lenders assess it as new credit instead of as an administrative change. Valuations, serviceability and internal approval all come back into play, which typically adds weeks. Measured against a settlement date already written into a contract of sale, that is a timing risk with a financial consequence attached. Equity Release Assessed on the Combined Pool A property that has performed strongly cannot be looked at on its own merits while it sits in a pool. The lender measures combined debt against combined value, so a flat valuation on one property can hold the overall LVR above the release threshold and block funds the strong property would have supported by itself. Portfolio Stalled by One Weak Valuation Because the titles are connected, one soft valuation reaches every decision. An oversupplied suburb, a building with