How to finance a granny flat in Sydney

Most granny flats in Sydney are funded by drawing on the equity in the existing property, either through a construction loan, a loan increase, or a redraw. Cash and personal loans make up most of the rest. Which option suits you depends on your equity position, your income, and how your lender treats the build.

This article explains how each one works. It is not advice about which to choose, because that depends on your circumstances and belongs with a broker or your lender.

This is the one people find least familiar, so it is worth explaining properly.

A construction loan does not hand you the whole amount at settlement. The lender releases money in stages, and each stage is paid after that part of the work is finished and inspected. You pay interest only on what has been drawn, which keeps repayments lower during the build.

Each drawdown usually needs an invoice from the builder and often a valuer’s inspection. The practical effect is that the build and the finance move together, and delays in one create delays in the other.

Broadly, expect to be asked for:

• A fixed price building contract, signed
• Council or certifier approval, so the build is legal
• Detailed plans and specifications
• Builder’s licence details and insurance, including home building compensation cover where it applies
• A valuation, usually “on completion”, which values the property as it will be once built
• Evidence of your income and existing commitments

The 2 that catch people out are the approval and the fixed price contract. Many lenders will not release construction funds without both, which means the approval pathway has to be complete before the finance is. It is worth checking your lender’s requirements early so the sequence works.

• Talk to a broker or lender about your borrowing capacity before you commit to a build
• Get a site assessment and a fixed price quote
• Get approval, whether complying development or a development application
• Sign the building contract
• Submit the contract, plans and approval to the lender
• Lender values the property on completion and formally approves
• Construction starts, with funds released in stages
• Final drawdown at completion

Doing step 1 first saves the most pain. Finding out your borrowing capacity after you have signed a contract is the wrong order.

• Will you lend against a secondary dwelling on the same title
• Do you require an “on completion” valuation, and who pays for it
• What are your progress payment stages, and do they match my builder’s
• Are there fees for each drawdown
• Will you count potential rental income from the granny flat toward my borrowing capacity
• What happens if the build runs over time

That question about rental income is worth asking specifically. Lenders treat projected granny flat rent differently from each other, and it can change what you are able to borrow.

Lenders generally value the property as a whole once the granny flat is complete. They are not valuing the granny flat as a separate asset, because it is not one. It cannot be subdivided and sold separately under the Housing SEPP.

So the relevant question is what the whole property is worth with an approved secondary dwelling on it, which brings you back to your suburb and your buyer pool.