Types of Loans to Finance a Granny Flat

July 26, 2023

Wondering how you could possibly finance a Granny Flat? Granny Flats, whether for expanding living space or generating rental income, often require specific financing solutions to suit individual circumstances. Its a common scenario that Australian's are lending against every day. This article delves into various lending scenarios and loan options designed to finance a Granny Flat.


Owner Occupied - Cash Out Using Equity

Homeowners with ample property equity and steady income can opt for a cash-out loan to cover the entire Granny Flat project. Such loans allow borrowing the full or partial project cost, with funds conveniently deposited into a savings or offset account for flexible usage during construction.

Most lenders don't mandate a fixed-price build contract, though some may request evidence for cash-out policy compliance. Importantly, rental income is not considered for lender servicing until the Granny Flat's completion. Certain lenders permit cash-out for this purpose, except when the project involves renovating an existing structure, which might necessitate a construction loan.

Owner Occupied - Construction Loan

In cases where homeowners lack sufficient equity and income for the total Granny Flat cost, a construction loan becomes a viable option. This loan facilitates borrowing the required amount, with the lender controlling fund releases based on a Progress Payment Schedule.

To secure a construction loan, a fixed-price build contract and Progress Payment Schedule are typically mandated by the lender. Rental income can be considered for lender servicing, and a Granny Flat valuation becomes necessary. The property value is then augmented by the completed Granny Flat or renovation, forming the basis for lending. Fortunately, most lenders accept construction or Granny Flat loans.

Investor - Cash Out or Construction

Investors exploring Granny Flat projects have the choice between cash-out loans or construction loans, contingent upon their equity and income situation. If rental income and valuation meet requirements, a cash-out loan is plausible. Conversely, if these criteria fall short, investors may require a construction loan.

During consultations with the lending team, investment strategies are thoroughly discussed, including options like interest-only or principal and interest (P&I) payments, offset accounts, etc., to maximise investment returns.


Reverse Mortgage

For older homeowners with significant property equity, yet retired or devoid of regular income, a reverse mortgage presents a suitable alternative. Such loans are determined by the borrowers' age and property value.

Reverse mortgage scenarios may not always require fixed-price build contracts, though this is subject to specific factors. Notably, rental income is not considered for lender servicing, and the property value remains unchanged, as lending is based on its current value.

Crucially, reverse mortgages can solely be undertaken by property owners on the title, with dependents or family members ineligible to contribute income towards loan purposes.


Key takeaway: Speak to a lender about all the options

Securing financing for a Granny Flat project entails an array of loan options catering to diverse situations. Homeowners and investors can select from cash-out loans, construction loans, or reverse mortgages, aligning with their equity, income, and unique objectives. Seeking guidance from seasoned financial advisors and lenders is advisable to determine the most appropriate loan type and secure financing for their Granny Flat venture. It is prudent to thoroughly explore each loan's terms, interest rates, and repayment options before arriving at a final decision.

Speak to Cubitt's about your Granny Flat Investment

At Cubitt's, we understand that financing a Granny Flat project can be a crucial aspect of turning your dream into reality. That's why we are proud to work with trusted mortgage experts, George Lemon and Peter Johnson, at Mortgage Choice. With their extensive knowledge and experience in the lending industry, George and Peter can help you navigate through the various loan options available and find the best lending solution tailored to your specific needs.

Whether you are a homeowner looking to cash out on your equity, an investor seeking to maximize returns, or a retiree considering a reverse mortgage, George and Peter will guide you every step of the way to ensure a smooth and successful financing process. Together, we are committed to bringing your dream granny flat to life, making it a seamless and rewarding experience for you.

Our friendly team understand that building a home is a unique and personal experience. We’re ready to listen to your needs, and provide customised Granny Flats to suit your lifestyle requirements such as wheelchair ramps and wider doorframes.

Are your ageing parents reluctant to downsize? Get them excited to move with our  extensive range of 2 bedroom Granny Flats in NSW and ACT

Have a limited budget? View our fantastic range of 1 Bedroom Granny Flats in NSW and ACT

For more information, call our award-winning customer service team on 1300 721 150 or book a Site Assessment using the form below

Free On-Site Assessment at Your Property

Interested in finding out how to make a positive investment from a Cubitt's Granny Flat or Home Extension? Get in touch for a no-obligation site inspection today.

If you are looking to purchase a new property and want to do a Granny Flat Suitability Check - please use this form instead.

We require your name, email and phone number to get back to you - and the more you can tell us about your build project, the more effectively our local teams can help.


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