In the fifth of our six-part Backyard Subdivision series guest author Bob Turnbull, Senior Relationship Manager at ANZ Bank discusses obtaining finance and dealing with your bank.
For many backyard developers, engagement with your bank will be required at some point. It is always best to do this early to understand what requirements the bank will impose on you either before you start developing or during the development process.
As this series has already mentioned, the rules around development frequently change as a bank adapts and learns from its own experience in the market. Sometimes conditions can be relaxed; sometimes conditions can be imposed by governing bodies such as the Reserve Bank of New Zealand. In most cases, the bank will honour a previous written commitment if such a policy change is made within a reasonable timeframe.
When approaching the bank to request finance to complete the development, make sure you are confident in your numbers. At first, this could be estimates to see if preapproval can be obtained, or quotes/invoices to support a formal application. Before committing to any finance, the bank will want to make sure that the risk is minimised and sufficient profit margins are built in. To know all this, the input costs must be less than the completed value. Banks may be able to provide a pre-approval that will contain a list of requirements that you have to meet. This will have a fixed date for expiry.
Servicing the loan
At all times, you will need to be able to service the fully drawn loan amount. This means for most people that they will not be able to do more than one or two buildings at a time and they will also need to keep their day job to ensure they meet the ongoing servicing requirements. There may be scope beyond this if the development is already presold however it may also have other conditions imposed.
The most common loan type we see is a construction loan, which would be a predetermined maximum loan amount with specific conditions such as only being able to draw down against it in line with the original budget provided. Other options may include a less restrictive Flexible facility which is open to advance funding at any time with the costs and responsibility being controlled by you. This also gives the ability for you to change the project part way through. This option is more commonly available in positions with strong equity (low LVR) and strong servicing.
All too frequently we see variations being made or additional expenses being incurred. Always know the cost to complete the development and the impact of any change on the end value. Should things change materially, you will need to discuss it with your bank. They may be able to increase your facilities or ask you to inject more capital. The bank will not be able to provide limitless amounts of money towards a development without a known completion amount/time. It is always best to talk through the project to keep everyone informed.
In the final part of our Backyard Subdivision series, we discuss the different types of insurance that come into play during a development project.