My construction loan is expiring, or my builder went into liquidation. How do I fund the finish?

Construction facilities are written for a fixed term, usually the build program plus a few months to sell. Wet weather, trade shortages, a slow certifier or a quiet market can push a sound project past that date. The loan does not extend itself.

Option 1: ask for an extension

The cheapest outcome if the lender agrees. Ask early, in writing, with an updated program and sales report. Expect an extension fee and possibly a rate increase. Banks under pressure to reduce development exposure often say no, or offer a short extension that only delays the problem.

Option 2: refinance the completed project

If the build is finished, or nearly so, take-out funding repays the construction lender and holds the finished asset while it sells or leases. Terms on this site are from 0.975% a month, up to 75% of value, for 1 to 12 months. Where most of the project has settled and only a few units remain, a residual stock loan does the same job against just the unsold stock.

Option 3: sell faster

Discounting clears debt quickly but is permanent. The comparison between a price cut and holding finance is worked through in sell or finance residual stock.

Option 4: fund the gap to finish

Where the problem is a cost overrun rather than time, a second-ranking loan or a refinance to a lender who will fund the cost to complete may be needed. The existing lender’s consent is normally required for anything ranking behind it.

Builder went into liquidation and the bank will not release more money

This is the hardest version of the funding gap. The builder has gone into liquidation, the site is locked and work has stopped, the bank has frozen progress payments, the home warranty claim is slow and capped, and the replacement builder’s quote is higher than what is left undrawn in the construction loan. A half built house is exposed to weather, hard to insure and close to unsaleable at anything near its finished value, so the clock matters.

Do these first, in this order:

1. Tell the bank in writing. Ask for its position in writing too: the drawn balance, what remains undrawn, whether it will fund a replacement builder, and what it needs to see. You cannot plan around a bank whose position you only have verbally.
2. Lodge the home warranty claim straight away. In New South Wales that is icare HBCF, in Queensland the QBCC home warranty scheme, in Victoria domestic building insurance (DBI). The cover generally pays the extra cost to complete the original contract scope above the original contract price, plus rectification of defective work, up to a capped amount per dwelling. It does not pay the whole new quote, it does not pay quickly, and it will not cover upgrades or scope the original contract did not include. Get a claim number and keep it.
3. Do not wait for the liquidator. The liquidator’s job is to realise the builder’s assets for creditors, not to finish your house. The usual outcome is that the contract is terminated and you are an unsecured creditor for anything you overpaid. Treat the site as yours to finish.
4. Secure and insure the site. The builder’s contract works and public liability cover ended with the builder. Arrange your own cover and lock the site, or no lender and no replacement builder will touch it.
5. Get a fixed price contract from the replacement builder. Every funder, including the warranty insurer, works from this document. A budget or estimate is not enough.

Why the bank will not simply top up. The bank approved a loan against a fixed price contract that no longer exists. An incomplete house is weak security, the original valuation is void, and a higher cost to complete may push the total loan past what its policy allows. Some banks will fund the balance once there is a new contract and a new valuation. Many treat it as a fresh application that they would rather not take mid-build, and the answer comes slowly.

The three real options. First, a cost to complete top-up from a lender that will lend against the on-completion value rather than the current as-is value. Second, a private construction or completion loan secured on the land and the partly built house, either behind the bank with its consent or refinancing the bank out entirely. Third, selling the site as it stands, which clears the debt but at a heavy discount to what the finished house would fetch.

How a private completion loan is assessed. The lender looks at the as-is value of land and works to date, the on-completion value, and the cost to complete taken from the new builder’s fixed price contract plus a contingency. Funds are released in progress draws against quantity surveyor or valuer inspections, so the money follows the work. Interest is capitalised into the loan, so there are no repayments during the build. The exit is a refinance to a normal home or investment loan once the occupation certificate issues and the house can be valued as finished, or a sale.

The consumer credit limit. If the house will be your family home and you are borrowing as an individual, the loan is regulated consumer credit, and private lenders of the kind matched through this site fund business and investment purposes only. A private completion loan fits a build held in a company or trust, an investment property, a spec home or a dual occupancy you intend to sell or rent. Do not sign a business purpose declaration for a home you are going to live in. If it is purely the family home, a licensed mortgage broker who works with specialist and non-conforming home lenders is the right person to approach, and the warranty claim and the bank’s written position are what they will need from you.

An illustrative $400,000 shortfall. Say the bank has drawn $700,000, the new builder’s fixed price to finish is $400,000 more than what remains in the facility, and the valuer puts the finished house at $1.6 million. A completion lender adds the shortfall, its capitalised interest and costs to the existing debt and tests the total against the on-completion value. At the 0.975% a month shown on this site, interest on $400,000 drawn progressively over a six month build is roughly $12,000 to $24,000 depending on how fast the draws are taken, plus establishment, legal and inspection costs. Total debt lands around $1.15 million against $1.6 million on completion, a little over 70%, which is inside the range a completion lender will consider. The same numbers with a $1.2 million finished value would not work without more equity or a partial sale.

What to gather before you enquire. The original building contract and the schedule of claims paid, the warranty insurer’s claim number and any assessment, the replacement builder’s fixed price contract and program, the bank’s position in writing with the drawn and undrawn balances, the most recent valuation, and how the property is owned. With those in hand, a lender can tell you within days whether the gap can be funded and on what terms.

What default costs

What a new lender needs

• Current payout figure and expiry date from the existing lender.
• Occupation certificate and title status, or a program to get there.
• Sales to date, contracts on foot and the price list.
• A valuation of the completed stock.
• The exit: sale, lease-up and refinance, or both.

Timing

Eight weeks is comfortable. Four is workable. With less than two, speed matters more than price, and a short bridging facility may be the first step, replaced later by something cheaper. Whichever route, tell the current lender what you are doing. A lender who knows a refinance is in progress is far less likely to enforce.