Pam Mulready’s 12-month interest-free renovation loan became an expensive choice when work on her inner-Melbourne home took more than 30 months to complete, quadrupling the original construction price and triggering year’s of legal hassle for compensation.
Mulready’s funding and building nightmare is an increasingly common experience for thousands of homeowners, particularly in coveted postcodes close to major cities where major rebuilds to accommodate growing families are preferred to moving into the suburbs.
“It ruined my finances and has taken me years to get my life back in order,” says Mulready about the botched building she started in 2010.
The project, which was originally intended to cost about $250,000, cost more than $1 million.
Australians spend more than $7 billion a year on renovations. Upgrades to kitchens, bathrooms and ground-floor extensions that integrate interior and exterior spaces are among the most popular, according to market research firm IBISWorld.
It is big business for the nation’s top lenders which generate about 30 per cent of earnings from residential mortgages and property-related transactions, says investment bank Morgan Stanley.
Phil Dwyer, national president of the Builders Collective of Australia, a lobby group to improve building standards and regulations, warns the number of disputes between renovators and builders is increasing as the volume of work rises.
Dwyer says: “Disputes with builders often also entangle surveyors, engineers, builders and other parties until the property owner becomes trapped in a minefield of bullshit.”
He says: “One of the biggest problems is that it becomes very personal for owners because it is their home. It is where they live and they want it to be perfect. That makes a building dispute very different. The disputes are generally real doozies.”
Louise Lucas, chief executive of The Property Education Company, a mortgage broker and buyer educator, says even small disruptions can blow out the budget and jeopardise the completion of many renovations.
“Most renovators fail to have enough buffer for things to go wrong, delays or complications. It often means they cannot complete the project and have to move in without fixtures and landscaping being completed.”
An example is a recent row between a renovator and builder about alleged over-payments, damages and defective buildings works that involved claims and counter-claims totalling more than $1 million.
The Victorian Civil and Administrative Tribunal spent more than three years deliberating on claims by the owner, builder and cabinetmaker until recently ruling the owner should be paid $150,000 in damages and $4500 costs.
Dwyer says that while most builders are diligent and honest, there are enough cowboys to cause thousands of renovators months of heartache and expense.
Get loan savvy
Bernadette Janson, founder of The School of Renovating, says renovators should familiarise themselves with the different features of lines of credit and construction loans on offer from lenders that are used to finance renovations.
“The key is being disciplined and staying within your renovation budget,” she says.
A construction loan allows borrowers to draw down the loan in stages to fund a renovation or build a new dwelling.
They are typically interest-only during the draw down phase, and revert to principal and interest after that.
The loan funds are advanced in stages as agreed construction milestones are met, sometimes referred to as progress payments. Interest is only payable on the debit balance.
Most lenders will insist the construction is carried out by a fully licensed builder who is ready to proceed immediately after the loan settles.
Further, a completed and witnessed building contract (including council permits) must be provided to the lender before formal approval.
Construction must usually commence within three months of the settlement date and be completed within 24 months .
A popular alternative is a line of credit loan, also known as a home equity loan, which is an approved credit facility that allows withdrawals as and when they are needed.
Lower interest rates usually apply than on a personal loan, or credit card, because it is secured against a property and is a lower risk to the lender.
“They provide greater flexibility in managing the size of the limit, enable repayments at any time and access to additional funds without the need for further approval,” says Lucas.
“But the cost of the loans is currently higher than any other home loans. During the past six to 12 months, their costs have risen sharply and are now generally much more expensive than a construction loan,” she says.
They typically do not have a set term, which means it is available for as long as needed.
“But a clear exit strategy is required, particularly for borrowers coming up to retirement,” she says.
A borrower who mismanages their loan could reduce equity, or might have to sell the property to meet their financial position.
Borrowers also need to be aware of monthly and annual fees that might make it more expensive than another kind of loan, or take longer to repay because of increased debt.
“Having more funds to hand can also be very tempting,” warns Lucas. “Borrowers need to be very careful that they do not allow the budget to blow out.”
Find a project manager
Dwyer recommends renovators consider using an architect to provide detailed plans about construction, joinery, manage costs during the entire project and negotiate any changes with the builder.
The alternative, using a draftsman to provide working drawings of the job, can cause problems because it can give a builder too much discretion about details such as joinery, bench tops, products and other finishings.
“It means a builder knows what is being committed too,” says Dwyer. “It is the safe way.”
He also recommends renovators obtain references from the architect and builder for their last three jobs and speak to previous clients about quality of the work, sticking to budget, deadlines and integrity.
Kate McMahon, director of architectural firm McMahon and Nerlich, says renovators with projects from $100,000 should consider architects to assist with designs, costs, selecting builders and referrals.
McMahon says: “You want a design that meets the clients’ dreams but matches their budget. At the beginning of a project the owner needs to be pragmatic and match what they have in mind with what the builder believes can be done.”
She says architects will help manage the entire project and “align the brief with their client’s budget”, which might mean amendments to the original plans if circumstances change.
Tips for renovators wanting to save money include choosing and buying fixtures, such as lighting and appliances, for which the builder will typically make a 15 to 20 per cent mark-up for selecting.
But she recommends allowing the builder to handle final painting. “It’s a stage of a project where building problems might be revealed,” she says.
Government building watchdogs, such as the Victorian Building Authority, recommend that renovators have a clear idea from the outset about time frames, budgets and what they want to use the renovated space for.
“Check with your local council about any specific local building or planning requirements in what you propose,” a VBA spokesman says.
“Talk to family friends and other people about their experiences. Knock on the doors of houses where you have been impressed by the building and ask who did it and how.”