Explaining kit home loans

Kit homes aren’t the same as regular new builds. Instead of building from scratch, you construct a kit home using prefabricated parts. However, many lenders are wary of kit homes and may not offer you the home loan product you want.
Alexi Neocleous

Kit homes offer an attractive way into the property market for both investors and first-time buyers. Built in factories, kit homes come in sections, which you piece together to make a home. It’s a DIY method that can save a lot of money when compared to traditional construction. It also takes much less time to get the home up and running.

There are a couple of catches, however. For one, it’s best to have some experience in the building industry if you want to buy a kit home. You can hire a licensed builder, but this adds to the cost. Secondly, you’ll find that many lenders don’t like giving home loans to kit home owners.

What Makes Lenders so Wary?

It comes down to the risk that comes with borrowing for a kit home. Lenders consider every possibility. If something goes wrong at the construction stage, you’ll only have your land left over as security for the loan. In many cases, the value of your land won’t cover the money your lender has given you.

As a result, lenders prefer one of two options. They’ll either only release funds once you have completed construction on the kit home. Or, they’ll need proof that you have built a lot of equity in your land before considering your home loan application. Even then, you can’t always access the home loan products available to traditional borrowers.

As mentioned above, you can work around this. If that’s what you hope to do, you must get advice from one of our home loan brokers.

The Payment Problem

The issue with lenders comes from the way kit home manufacturers want to be paid. Most kit home builders want you to pay for the materials in full. Very few offer financing details, which means you’re putting up a lot of money upfront to get the home.

Naturally, this conflicts with the traditional home loan model. Lenders don’t want you to borrow the entire value of a home.

A construction loan may help. For these loans, lenders will offer up portions of the money you need, depending on what phase of construction the property is in. Some kit home manufacturers will match this model. They’ll provide you with the materials you need to complete a phase, you’ll get the money from your lender for the next phase, and then you use this money to pay for the next part of the kit home. However, you need to work with a licensed builder to do this. Most lenders do not offer construction loans if there is no licensed builder involved in the project.

So, you have two options. You can buy the entire kit home upfront, then apply for a loan that covers the land and the entire construction of the home. Or, you can try to match the construction loan payments with your kit home manufacturer’s distribution model.

What Can I Borrow?

This usually depends on what type of borrower you are. If you have, or are a licensed builder, you can borrow up to 90% of the combined value of the land and your construction costs. This falls to 80% if you’re looking for a low doc loan.

But what if you don’t use a licensed builder. In this case, you can only access products with a maximum loan to value ratio (LVR) of 75%. As a result, you’ll have to pay a sizeable deposit before starting with the construction of your kit home. This also usually means you’ll have to pay for the entire kit home upfront.

Using a guarantor could provide you with a way out of paying this deposit. In some cases, you could access the entire value of the land and your construction costs if you have a guarantor.

How much can I borrow?

Use uno's calculator to estimate your borrowing capacity.

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Some Kit Home Tips and Tricks

We’ll leave you with some useful tips to keep in mind if you want to build a kit home:

  • Make sure that you have enough money to complete each phase of the construction process. This is particularly important if you’ve negotiated a phased construction loan with your lender. If you can’t complete a phase, you can’t access the money for the next phase. This will leave you in serious trouble with your lender.
  • Look for a lender that handles specialised loans. Most major banks want to avoid the unusualness of kit homes.
  • Get your plans in place before you consider applying for a home loan. Every little change you make could damage your lender’s confidence. As a result, it’s best to know exactly what you want to do before speaking to any lenders.

What to Do Next

You can get a home loan for a kit home, but you have to know where to look. Before you try to move forward, we recommend you take the following steps:

  • Calculate how much you need to borrow to build your kit home
  • Book a call with an uno home loan consultant.

This information is general in nature and you should always seek professional advice when making financial decisions.

Alexi Neocleous
* Three year fixed rate, owner occupier, P&I loan with a maximum LVR of 95% and a loan amount >$150,000. Lender rates and products may change. We cannot suggest you remain in or switch to any loan until we complete our assessment. Fees and charges apply. ^ WARNING: This comparison rate is true only for the examples given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. The comparison rate is calculated on the basis of a loan of $150,000 over a term of 25 years. ± All loan applications are subject to uno assessment and lender approval. uno does not guarantee that it will be able to find a customer a better loan than the one they currently have or to save them money.