How can you benefit from a new build and what’s involved in getting a construction loan?
New builds are the talk of the property world now the federal budget details have been released, but there is more to financing this type of real estate than first meets the eye.
But before you make any moves, you need to ensure you’re using a new build finance specialist like Intuitive Finance to ensure you successfully navigate these loans. Those who don’t will soon discover they can be as complicated and complex as a new property’s actual construction, with similar delays and stressors.
New build home loans
If you’re planning to purchase a move-in ready property in a new housing development or apartment building, you won’t need new build financing. In this situation, you’ll just need a standard home loan.
But you will need new build financing or otherwise known as a building or construction loan, if you’re planning to construct a property on vacant land, or if you’re organising a replacement for an existing knockdown-rebuild dwelling.
Building or construction loans can also be utilised for major renovations of your current established property, such as adding an extension.
Either way, you’ll find there’s key differences between construction loans and an everyday home loan.
Construction loans vs standard home loans
There are a variety of ways these loans differ.
With a construction loan, for example, you won’t receive one lump sum payment; instead, your lender will hand over several smaller ones as the construction of your new property evolves.
These “progress payments” are allocated to the owner or builder at milestone stages of the construction work, such as laying the slab; building the framework; locking the property up (i.e. roof and doors on and external cladding – brick or timber etc.) the fit out; and the final completion.
Construction loans are usually interest only whilst you build in order to minimise your cash flow through this process. But the interest will only be charged on the monies your lender has released up until that point, and not on the total loan amount which is very important to note.
As well, expect your lender to want every detail of your new build’s construction process, such as building plans, tradespeople contracts and warranties, copies of receipts and invoices, and cost estimates.
In most instances your loan will switch to a standard home loan once the new build has been completed.
Will new build Federal Budget changes help or hinder investors?
The comparisons between construction and standard loans are almost worthy of their own article. But I couldn’t talk about construction loans without pointing out why the main reason new builds are the talk of the town right now.
It’s due to the multiple changes to property investment announced in the May 12th Federal Budget.
The Budget proposals clearly show the government wants to push investors to choose new builds, over established property. Whether this idea will be realised is what has many in the property industry upset, to say the least.
But firstly, let’s take a quick look at the Budget’s proposed new property investment changes:
Capital Gains Tax (CGT) changes from July 1, 2027:
- the “blanket” 50 per cent CGT discount for property investors, and all other asset investment owners, will be replaced by a cost-base indexation system, with a 30 per cent minimum tax rate available for net capital gains
- property owners who sell their current homes in the future can still receive the 50 per cent CGT discount for gains accrued between now and July 1, 2027; in this way, they will be partially “grandfathered”
- property investors who buy brand new properties can choose either the former 50 per cent CGT discount, or cost-base indexation system and 30 per cent minimum tax rate
Negative gearing from July 1, 2027:
- negative gearing on residential property investments will be limited to brand new builds only
- negatively geared properties purchased before the Federal Budget announcement will be “grandfathered” i.e. they’ll be exempt from Budget changes, regardless of whether they’re brand new and established properties.
What to expect from new build investor changes
Do the new build Budget proposals mean we’ll see new developments springing up across the country now? While I think there’ll likely be an uptick in new build action, as is usual with real estate – and Budgets – there’s more to this situation than meets the eye.
I like how Housing Industry Association (HIA) chief economist Tim Reardon described the Budget’s new build plans when he said, “it’s attempting to solve a housing shortage by discouraging the investment needed to build more homes”.
Mr Reardon added that the government assumed investors would redirect their money into new homes, but housing investment just doesn’t work like that.
Plus, infrastructure and planning reforms means it can take time to deliver new housing, yet the Budget changes will immediately hit consumer confidence, and the market overall.
What the government hopes to achieve
Albo and his team clearly believe their Budget changes will give Australia more new housing. After all, this Budget was all about Treasurer Dr Jim Chalmers’ often repeated, and heartily hypocritical phrase, of “intergenerational equity”.
“These changes will help level the playing field for first home buyers, preserve the gains investors have made, and support investment in new housing supply,” Dr Chalmers announced on Budget night.
While this is all great in theory, let’s look at the reality of new housing in Australia right now.
First, and foremost, the Federal Government’s 2023 National Housing Accord is lagging badly. The target of building 1.2 million new properties across the country by July this year is highly unlikely to be achieved with the Accord’s overall target still facing a cumulative shortfall of 77,662 properties, according to Australian Bureau of Statistics (ABS) data.
Institute of Public Affairs’ senior fellow, Dr Kevin You, described the Accord as a “public policy shambles”, which had never reached even its minimum monthly target… and that’s after ABS figures showed recent increases in high-density building approvals.
Admittedly, Victoria is doing better when it comes to housing supply. The ABS found the state has built 55,000 new homes, or more, every year for the past decade.
Not bad, Victoria – but then again, you’re also an excellent case for how property investment reforms, such as the new land taxes introduced in January 2024, can result in landlords fleeing to other locations with better investment opportunities.
What qualifies as a new property?
I wanted to quickly touch on this point, as it’s an important one for potential new build property investors.
To quote the Federal Government: “new builds (can only be) residential properties which genuinely add to supply”.
So, replacing one knock-down rebuild property with only one other dwelling doesn’t qualify as a new build. But replacing the same property with one of more dwellings – such as a duplex or two separate townhouses – will.
Other genuine new builds will be the more obvious ones of house-and-land packages, off-the-plan properties, and new homes built on vacant land. But to quote the government again: “new builds cannot have been previously sold, unless first owned by the builder and not occupied for more than 12 months.”
Remember, if you’re not sure about this point, always talk to a new build financial specialist, beforehand.
New build investors: CGT changes and what they mean for you
From 1 July 2027, both current and future new build investors have two CGT: the “blanket” model of a 50 per cent discount or the new plan of a cost-base indexation system or inflation indexation method, alongside a 30 per cent minimum tax rate for net capital gains.
In comparison, established property investors have no choice but to go with the latter option, rather than the former one, which was first introduced in 1999 by John Howard’s Coalition government.
Clearly, the two-pronged CGT options mean Albo and Jim want investors to buy up big on new, rather than established, housing.
But at least, both types of investors can enjoy the 50 per cent CGT benefit for gains accrued up to 1 July 2027. In other words, this CGT returns will be partially “grandfathered”.
Should I choose the old or new CGT system?
Generally speaking, the 50 per cent tax benefit is a better option for properties enjoying a high rate of returns or for investors in a lower tax bracket.
The opposite is true for the new cost-base indexation system.
If you’re not sure which option is best for you, consult your accountant and/or financial advisor.
New build investors: negative gearing changes
There’ll be no changes to negative gearing for new build investors, either now or beyond 1 July 2027 (unless Dr Chalmers breaks more election promises). This includes new builds purchased before the May 12th Federal Budget announcement.
In other words, negative gearing is fully “grandfathered”, and you can continue to reduce your tax liability if the costs of owning your new build outweighs the rental income in generates.
How can a new build finance specialist help me secure a construction loan?
New build finance specialists like the team at Intuitive Finance can help guide you the finance process with a nuanced understanding of how new-build finance actually operates. Our experienced team works with more multiple lenders every day, with many of them offering great new build loans, perfectly suited to your construction plans.
