Okay, right about now you're staring at the screen wondering if I've gone completely bananas. Of course it's a good thing if your site rises in value - right?
Hey, I'm not going to lie - most of the time the answer is yes. But I am going to add my favourite phrase into the mix - it depends.
Let me explain...
The first, and probably most crucial factor in this discussion is how you're planning to finance settlement. There are two main ways - residential and commercial finance.
Residential Finance
Residential finance is something most of us use when buying our own home. You save up the deposit and costs, the lender gives you the rest, and you pay off the loan for the next 30 years or so.
Residential lenders come in many guises. There's the big 4 banks we're all familiar with, then there's a raft of second tier lenders comprising smaller banks and other well-known lenders, and then there's a bunch of much smaller lenders who generally specialise in finance for those who can't get more standard finance, and charge a lot for that service.
The size and approach of all these lenders varies enormously, but they all have one thing in common. Essentially, they expect that you're going to be paying them lots and lots of lovely interest over many years. Now, it's quite possible you'll find a way to pay off the loan in less than 30 years, but it's still likely to be well into double digits.
Another possibility is that given most people move regularly, you'll sell your home and pay them out. Either way, they're still most likely going to have you as an interest-paying customer for many years.
Commercial Finance
Commercial finance, on the other hand, works quite differently. Again, there's a range of different lenders, but they're much more open to the idea that you're developing the property and will be selling it off at the end of the project.
They're also more open to funding different types of purchases, or funding construction, and a whole lot more. Most of the time they're not expecting to have you paying them interest for more than a couple of years. As a result, their interest rates are higher, to compensate for the fact that you're not going to stick around.
Okay, so now the difference between the two is clear - residential lenders expect you to have your loan for a substantial number of years, commercial lenders generally don't.
Which then feeds into what I said earlier - the value of your property rising before settlement isn't always a good thing.
On one level it is - any valuation you get done as part of the finance process is most likely to come in where you need it to, rather than falling short.
But it's the REASON for that rise that's the most important thing to think about.
If it just happened because of organic growth in the market, great. Any type of lender is going to be happy to see that, because it means the security for the loan is now worth more money.
But if it happened because of something you specifically did to manufacture growth, that's a different story. Because if it walks like a duck and quacks like a duck, it's probably a duck. Which in this case means that if you've done something specific to raise the value, you're acting like a developer. And a residential lender is likely to run for the hills at that point.
Okay, they won't actually run for the hills, but what will happen is they'll either introduce you to a lovely person in their commercial finance division, or they'll reject your loan.
And I get it. They're working on the idea that you're going to be their customer long-term and suddenly they've gotten a whiff of development? Immediately they think you're not going to stay around, and that's not their business model. The goalposts have moved - and you're out.
Obviously if you've managed to get a development approval for the property before settlement, that's a major red flag. Today's increasingly digital society also means it's getting harder to hide what you've been doing. Maybe they've requested bank statements for the last 3 months and can see a substantial payment to a town planning business. They might not immediately pull their loan, but you can guarantee they'll be asking some sticky questions.
Commercial lenders, on the other hand, are going to jump with joy if they see signs of development activity for the site. They like the fact that you're already progressing on the project and being proactive. It shows that you're experienced enough to know what you're doing and that bodes well for the profitability of the project and your ability to pay them back.
That increase in value might even mean that you've added enough soft equity (fancy name for uplift) for you to be able to settle without needing to put in as much cash of your own. Although I have to caution - don't rely on that, as valuers are notoriously conservative.
I hope I've reassured you that your site rising in value before settlement is generally a good thing. But if you're planning on using residential finance to settle, be aware that the lender may pull the pin if they suspect it's because of development activity.
Hey, I'm not going to lie - most of the time the answer is yes. But I am going to add my favourite phrase into the mix - it depends.
Let me explain...
The first, and probably most crucial factor in this discussion is how you're planning to finance settlement. There are two main ways - residential and commercial finance.
Residential Finance
Residential finance is something most of us use when buying our own home. You save up the deposit and costs, the lender gives you the rest, and you pay off the loan for the next 30 years or so.
Residential lenders come in many guises. There's the big 4 banks we're all familiar with, then there's a raft of second tier lenders comprising smaller banks and other well-known lenders, and then there's a bunch of much smaller lenders who generally specialise in finance for those who can't get more standard finance, and charge a lot for that service.The size and approach of all these lenders varies enormously, but they all have one thing in common. Essentially, they expect that you're going to be paying them lots and lots of lovely interest over many years. Now, it's quite possible you'll find a way to pay off the loan in less than 30 years, but it's still likely to be well into double digits.
Another possibility is that given most people move regularly, you'll sell your home and pay them out. Either way, they're still most likely going to have you as an interest-paying customer for many years.
Commercial Finance
Commercial finance, on the other hand, works quite differently. Again, there's a range of different lenders, but they're much more open to the idea that you're developing the property and will be selling it off at the end of the project.
They're also more open to funding different types of purchases, or funding construction, and a whole lot more. Most of the time they're not expecting to have you paying them interest for more than a couple of years. As a result, their interest rates are higher, to compensate for the fact that you're not going to stick around.
Okay, so now the difference between the two is clear - residential lenders expect you to have your loan for a substantial number of years, commercial lenders generally don't.
Which then feeds into what I said earlier - the value of your property rising before settlement isn't always a good thing.
On one level it is - any valuation you get done as part of the finance process is most likely to come in where you need it to, rather than falling short.
But it's the REASON for that rise that's the most important thing to think about.
If it just happened because of organic growth in the market, great. Any type of lender is going to be happy to see that, because it means the security for the loan is now worth more money.
But if it happened because of something you specifically did to manufacture growth, that's a different story. Because if it walks like a duck and quacks like a duck, it's probably a duck. Which in this case means that if you've done something specific to raise the value, you're acting like a developer. And a residential lender is likely to run for the hills at that point.Okay, they won't actually run for the hills, but what will happen is they'll either introduce you to a lovely person in their commercial finance division, or they'll reject your loan.
And I get it. They're working on the idea that you're going to be their customer long-term and suddenly they've gotten a whiff of development? Immediately they think you're not going to stay around, and that's not their business model. The goalposts have moved - and you're out.
Obviously if you've managed to get a development approval for the property before settlement, that's a major red flag. Today's increasingly digital society also means it's getting harder to hide what you've been doing. Maybe they've requested bank statements for the last 3 months and can see a substantial payment to a town planning business. They might not immediately pull their loan, but you can guarantee they'll be asking some sticky questions.
Commercial lenders, on the other hand, are going to jump with joy if they see signs of development activity for the site. They like the fact that you're already progressing on the project and being proactive. It shows that you're experienced enough to know what you're doing and that bodes well for the profitability of the project and your ability to pay them back.
That increase in value might even mean that you've added enough soft equity (fancy name for uplift) for you to be able to settle without needing to put in as much cash of your own. Although I have to caution - don't rely on that, as valuers are notoriously conservative.
I hope I've reassured you that your site rising in value before settlement is generally a good thing. But if you're planning on using residential finance to settle, be aware that the lender may pull the pin if they suspect it's because of development activity.
