Brokers can help customers build dream homes

Despite the challenges faced by the building industry, there are still plenty of opportunities for brokers to assist clients with their construction finance needs

ANYONE WHO has built a home in Australia in the last 12 months would know that it’s not an easy task. The nation’s construction industry has been hit by a myriad of problems and challenges: rising interest rates, high inflation putting pressure on the cost of building materials, as well as supply chain problems and labour shortages. A number of construction firms have also collapsed over the past six months, owing millions of dollars to creditors and causing anguish for customers who are left with unfinished homes. The latest ABS building approval data shows that the total dwellings approved in January 2023 fell 27.6% for the month and were down 8.4% annually. For private sector houses the monthly drop was 12%, and for apartments it was 40.8%. But the difficult times won’t last forever; already there are signs that

Buchanan says the good news is that what goes down must come up. This is particularly true of construction as demand climbs on the back of migration growth, the inevitable easing of supply and costing issues, and a likely wind-back of interest rates in the coming 12 months. He says other government schemes will assist but only marginally as they are generally designed for first home buyers or affordable housing projects. Rakhit says the current economic climate is creating challenges for many people, and with the rising cost of living and costs of construction, exacerbated by supply chain issues and skills shortages, this has led to a slowdown in the property market.

Lenders have different capital requirements and a different risk profile when assessing these finance applications. “Brokers should not only be aware of this but also be experienced in these types of applications or seek help from those that are experts in this field,” Buchanan says. He says brokers should always communicate clearly how construction loans are different, and what the lender requirements are for fixed price contracts, drawdowns and sunset clauses, for example. “Construction finance discussions should especially be held with clients intending to buy off the plan, and the additional completion valuation risks and limited time offered to settle after completion of the project.”

Total dwelling units approved

Decline in dwelling approvals across housing sector

Rates – people are finding it hard to service their debts as required Costs and supply – drawn-out, expensive projects are causing cash flow pain Consumer confidence – people are worried that the builder they choose might collapse and are delaying engagement

“Bankwest’s construction volumes have declined in line with the market, which has contracted as a result of a number of factors, such as construction costs, labour supply and the end of federal and state government stimulation schemes from 2020 to ’21,” he says. “We’re also seeing some construction companies taking the responsible step of limiting new clients while they work through the backlog, and that leads to a natural decline in applications. However, once those companies turn the tap back on, so to speak, and cost of living pressures ease, I would expect to see construction volumes start to increase.”

Specialist Finance Group is a family-owned business that’s been serving the broking community for more than 30 years. With a customer-centric model, SFG provides its members with the best possible systems, services and support to assist them in growing and improving their businesses. SFG’s unique model has seen rapid expansion in recent years that has consistently delivered results well above system.

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Bankwest’s vision is to be a simple, easy bank for the Australian homeowner of today and tomorrow, and its purpose is to build a brighter future for all. Bankwest provides personal and everyday banking solutions for customers across Australia, supporting them in doing their banking in the ways that suit them, with innovative digital solutions, an Australia-based 24/7 Contact Centre, a passionate broker community, and in-person options through its WA branch network and Bank@Post partnership, providing access to more than 3,500 outlets across the country.

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“Brokers looking to build a solid pipeline both of customers and future cash flow have the opportunity to grow their skill set in this space where opportunities will follow,” says Buchanan. He says brokers who have good experience in construction finance can leverage this when engaging prospective clients and referral partners. “The reality is that brokers have far more knowledge and access to a wide variety of lenders who specialise in this space. The consumer awareness that brokers bring to their clients for these transaction types is simply not available through other channels.” Buchanan says combining this with brokers managing the process from end to end makes it a very simple choice for consumers and builders when deciding who to place their finance needs with.

“Bankwest supports customers purchasing a house and land package by enabling the entire debt to be consolidated in one loan, whereas many banks require customers to split the lending between the land and construction components”

Ian Rakhit, Bankwest

In Partnership with

The majority of construction loans originate from first home buyers, who are borrowing at the maximum LVR available – this means the equity in the property takes several years to build up before refinancing becomes an option. Rakhit says a common source of construction customers for brokers is through an affiliation with building companies. “Brokers then also have their standard reliable lead sources of their existing customer base and referrals,” he adds. Bankwest finances construction loans through either of its variable rate home loan products – its Complete Variable (package) and new Simple Home Loan – both of which are interest only until fully drawn. Rakhit says different products have their advantages, so it’s important for brokers to discuss with customers which would best suit their individual financial needs. In the Complete Variable package, all progress payment and inspection fees are waived, because the customer is paying a $395 annual fee. Customers can have up to nine offset accounts with no monthly charge, and an optional credit card with no annual fee. Rakhit says the Simple Home Loan has been designed as a simple option for customers who don’t need or want all the package features, with a monthly fee payable for any features they do want. There’s no annual fee, but customers are liable for all progress payment and inspection fees.

“Brokers looking to build a solid pipeline of both customers and future cash flow have the opportunity to grow their skill set in this [construction finance] space where opportunities will follow”

Blake Buchanan, Specialist Finance Group

building supply issues are easing and that it won’t be too long before the Reserve Bank of Australia eases back on interest rate hikes. There are still plenty of opportunities for brokers to offer construction finance options to their customers looking to build a home. MPA spoke to Blake Buchanan, general manager of broker aggregator Specialist Finance Group, and Ian Rakhit, general manager third party at Bankwest, about the construction finance market and how brokers can get involved.

Industry experts

Christopher Lee

MFAA head credit adviser, Finsure Finance and Insurance

Stewart Saunders

Heritage Bank

Ian Rakhit

Bankwest

Blake Buchanan

Specialist Finance Group

Industry experts

Blake Buchanan, general manager at SFG, is an expert in the broker channel with some 20 years’ experience in the finance industry, specialising in broking, lending and aggregation. Buchanan is known for his expertise and passion for the broker channel, along with his ability to deliver strong distribution results through systems, people, processes and partnerships.

Specialist Finance Group

Blake Buchanan

Bankwest general manager Ian Rakhit first led the bank’s third party team in 2010. He is an experienced leader with extensive skills across broker, colleague, customer, compliance, cost and outcomes and has led both first party and third party teams. Rakhit has an extensive banking track record internationally. He joined Bankwest in 2007 from the UK, where he led the broker team for more than a decade. Rakhit prides himself on his ability to communicate at all levels, to ensure the customer is always at the heart of decisions made, and to show genuine care for his team, brokers and customers.

Bankwest

Ian Rakhit

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Heritage Bank

Stewart Saunders

MFAA head credit adviser, Finsure Finance and Insurance

Christopher Lee

MFAA head credit adviser, Finsure Finance and Insurance

Stewart Saunders

Heritage Bank

Ian Rakhit

Bankwest

Blake Buchanan

Specialist Finance Group

Industry experts

Specialist Finance Group

Blake Buchanan

Bankwest

Ian Rakhit

Heritage Bank

Stewart Saunders

MFAA head credit adviser, Finsure Finance and Insurance

Christopher Lee

Construction industry facing challenges

Blake Buchanan

Specialist Finance Group

Ian Rakhit

Bankwest

Stewart Saunders

Heritage Bank

Christopher Lee

MFAA head credit adviser, Finsure Finance and Insurance

Mark HarChristopher Leeon

Heritage Bank

Stewart Saunders

Bankwest

Ian Rakhit

Specialist Finance Group

Blake Buchanan

How do construction loans differ from a standard home loan?

Published 10 Apr 2023

Dwelling approvals in Australia – Jan 2023

Seasonally adjusted

3,000

6,000

9,000

12,000

15,000

Private sector houses

Private sector dwellings excluding houses

-27.6%

-13.8%

-40.8%

-8.4%

-12.0%

-0.3%

No. of dwellings

Monthly change

Yearly change

Total dwelling units approved

Private sector houses

Private sector dwellings excluding houses

3,000

6,000

9,000

12,000

15,000

-13.4%

-17.6%

-5.7%

-3.0%

-4.1%

-2.1%

No. of dwellings

Monthly change

Yearly change

Trend

Source: Australian Bureau of Statistics

2013

100

125

Gross value added ($bn) by Australian construction industry, 2013–22

Source: Statista

150

175

2014

2015

2016

2017

2018

2019

2020

2021

2022

$152bn

$157bn

$152bn

$147bn

$150bn

$153bn

$150bn

$141bn

$150bn

$155bn

Buchanan says it’s normal to see a slowdown in financial transactions across the board during interest rate cycles such as the one the market is in now. “The demand for new homes, and land to build them on, has been constant over the decades, with only a slight reprieve coming from the COVID years as migration fell significantly,” he says. “However, not only is the construction sector dealing with the rate cycle, but increased costs of goods, supply, and labour issues. This is resulting in the highly publicised collapses of building firms.” These factors have had a significant flow-on effect on consumer confidence. Buchanan says building firms are being hit by a “triple whammy”:

Rakhit says it's important for homebuyers to understand the difference between construction loans and home loans and consider it when taking out a loan, because there are standard differences, as well as points of difference specific to Bankwest. The standard difference with construction loans is that customers are placed on an interest-only contract during the building phase, he says. Bankwest differs from other lenders in two key ways. Firstly, Rakhit says, the bank supports customers purchasing a house and land package by enabling the entire debt to be consolidated in one loan, whereas many banks require customers to split the lending between the land and construction components. Additionally, Bankwest only requires boundary fencing and the driveway to council crossover to be completed for its minimum fit-out, which is less stringent than the requirements of some lenders. Buchanan says construction finance arrangements generally incur more risk and mean slower payments for brokers as they are remunerated when the construction drawdowns are made. They also attract more work than a standard loan as there are usually two components – a land loan and a construction loan, typically requiring the broker to submit the drawdown instructions to the lender.

Broker benefits and sourcing clients

Rakhit says Bankwest is committed to being the best bank in the country for brokers, and when it comes to construction financing, that commitment is reflected in the support options it offers brokers to guide them through the process. “The Bankwest Broker Portal has some incredibly helpful tools and resources that enable brokers to self-serve much of their needs in their own time, while our Credit Hotline and dedicated BDM team are also available.” Construction loan customers are particularly valuable for brokers, as they generally maintain long-term relationships, says Rakhit. This is especially so in the current market, given the length of time it’s taking to build a new home.

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