How you finance your granny flat is a key consideration if you intend to build one. Your property might have the space for a granny flat and there are definite financial advantages to building what can become a multi-purpose space. But although they are a cost-effective way to add value to a home, they do involve an initial outlay. Fortunately, there are several different ways to obtain finance for a granny flat. Here we take you through the different pathways.
How much would it cost you to finance a granny flat?
How much it will cost to finance a granny flat depends on a number of factors. The first thing to consider is the granny flat itself. Deciding what size you would like the dwelling to be, as well as how many rooms you want it to have is the first step. The bigger the granny flat, the more separate internal areas, and higher likelihood of cost increases. Your choice of materials, finish and aesthetic style will all also play into the cost of the build.
It’s also important to factor in other, less obvious costs, such as the servicing and installation of utilities. For these reasons, it’s difficult to provide an exact estimate of how much a granny flat will cost. Generally, though, estimates vary from between $100,000 and $200,000, depending on how large or luxurious a flat you’re intending to build.
What are the different options for financing a granny flat?
The different options available for financing a granny flat depend largely on your disposable income and your credit rating. Some of the primary options are loans, leveraging home equity, downsizing and pooling your money with others for the investment.
Loans
Loans are one of the most common options for granny flat financing. There are a number of different loan options on the market. You could take out a personal loan, depending on the amount of money that you wanted to borrow, or you could secure a loan against your property. Coming to a formal arrangement with a family member is another available loan type. Perhaps the most popular type of loan to finance a granny flat is a construction loan.
Construction loan
A construction loan differs from a traditional home loan because the money is released in stages. It is designed to coincide with the granny flat builder hitting certain milestones. The advantage of this structure is that you will only pay interest in the amount of money that you have drawn down, rather than the loan amount in total. So if your total loan amount is $200,000, but your first milestone is $50,000, you will only pay interest on that initial $50,000, until more of the money is released. Due to the intricacies of the loan, however, it is slightly more complex to apply and qualify for than a standard home loan. Construction loans are a good option for those who don’t have enough equity in their home to cover a build. Their interest rates are often higher than a traditional home equity loan, however, so it’s worth really investigating how to secure a loan for your granny flat before you jump in.
Home equity
Another option is to release some home equity to free up the funds required to build a granny flat. It is likely that your home has increased in value over the time since you bought it. Releasing home equity means leveraging the increase to borrow against the increased value. You can do this either by refinancing your existing mortgage or by using a HELOC (Home Equity Line of Credit) as a revolving line of credit secured against your home. Whichever method you opt for, remember that your granny flat loan will be secured against the value of your home. If you can’t repay the loan, you risk losing your home. You should also check carefully and see which option is right for you – HELOCs tend to have variable interest rates, whereas a standard home equity loan offers fixed rates.
Downsizing
Downsizing is a good option for homeowners looking to generate a second income stream without overextending themselves. Homeowners can downsize from a larger home to a smaller home with space to build a granny flat. While this may seem like a lengthy process, it guarantees additional income and removes the running costs of owning a large property.
Pooled investment
A pooled investment option means bringing together additional investors who want to invest in your granny flat. This is not a hugely common approach to funding a granny flat, but it is a creative one. The team, or pool, of investors would share the initial expenditure, with a view to renting out your granny flat, either long-term or short-term as an AirBnB.
The funds accrued from renting out the property would cover the costs of running it, with profits split equally between the investors. This is a pathway that might appeal to those with a close group of friends or family members they could team up with. Anyone considering this route should think carefully about how the agreement will be structured and how formally it needs to be drafted. Careful planning with exit strategies built in, and clear roles and responsibilities delineated, is necessary to ensure that everyone’s investments remain protected.
How can you qualify for a granny flat loan?
Qualifying for a granny flat loan depends on the type of loan you are looking for. Although the criteria for a loan will vary, factors like having a stable income and a good credit score make a huge difference. Having the necessary permissions and approvals to build a granny flat in place are also important.
How can I secure a construction loan?
In addition to providing details about your income, assets and liabilities, a construction loan requires you to provide details of the building plans for your granny flat. Part of this will include evidence that your builder is legitimate. A property appraiser will then work out how much the property is likely to be worth when it’s constructed, and assess the required loan amount to cover it. There are also a number of other reports and plans you will need to provide in order to help validate your granny flat proposal.
As with every building project, there are plenty of things to consider and parts of the process can seem overwhelming. Partnering with GFWA takes the stress out of the undertaking. We can design your granny flat, customising our build specifically to incorporate your ideas and manage the entire approvals process, so it’s hassle-free.
If you have any questions, don’t hesitate to contact our team. Alternatively, come to our showroom and see our granny flat display homes in person.
