Choose Your Loan

Increased competition means a better deal for borrowers, writes PAUL COOMBES.

So you've decided on a home. Now all you need is a loan. As any television viewer knows, lenders' ads virtually demand you walk through their doors and dip your hands into their kitty to fulfil your residential dreams. But once you move outside the existing suburban home, lending options tighten up.

This means caution must prevail, even though borrowing for property looks easy with interest rates at a

30-year low. You should do your calculations on what you can afford to repay in terms of your income and outgoings. You should allow for unplanned expenses and budget for an interest rate rise of 2 per cent.

The good news is that with vigorous competition among lenders, they have had to improve their act. It is now possible to get most loans approved within a short time. Lenders have also become more flexible when structuring packages.

It pays to shop around for a loan to suit you over the longer term - don't just consider the first six or

12 months and don't be seduced by introductory reduced-rate loans. The rate can bounce back and bite after the first term.

While there is general euphoria in the mortgage market, it isn't quite as easy for owner-builders or kit-home buyers. Lenders are still nervous about these forms of building and impose stricter requirements.

Bill Rankin, national manager lending services, Mortgage Choice, indicates that a major area of improvement is in lending for

brand-new homes. "When there is a reputable builder, lenders treat these as construction loans. They want to see a fixed-price contract. Building price increases can result in the need for a new mortgage with subsequent costs, also carrying the risk of having the new loan declined.

"Loans are usually at the

standard variable interest rate and the lender agrees to draw-down payments. When construction is completed, borrowers can change to a loan more suited to their needs."

Lenders are generally more wary of owner-builders (who have a reputation for under-budgeting and overspending) and may require them to put up a greater share of the cost. In these instances valuations and paperwork to meet draw-down payments may be more stringent.

The problem is worse with kit homes as most non-bank lenders won't touch these, particularly if the owner is also the builder.

When there is a licensed builder involved, loans are more likely as the building is expected to be completed within time and budget. Rankin says Westpac will lend up to 65 per cent of the cost but requires thorough construction documentation before payments are advanced.

Some lawyers lend on brand-new and kit homes. Lawyer Peter Cornock says these loans are up to 66 per cent of valuation, by a registered valuer, for one to two years, interest only.

The Commonwealth Bank can lend for progress payments where borrowers have "good equity" in the land on which the kit home is being built, or can offer other security.

The banks and bigger lenders such as Aussie Home Loans will lend to people looking to buy vacant land at their normal home loan rates and will fund homes built by professional builders. The good news is that once your home is constructed you are eligible for the full range of home and investment loans.