How to Finance a Modular Home in Australia

Modular homes, also known as prefab or prefabricated homes, are gaining popularity in Australia thanks to their efficiency and relative affordability.

Unlike traditional homes that are built on-site from scratch, modular homes are constructed off-site in a factory environment and then transported to their final destination. This process can reduce the construction time and potential delays caused by bad weather.

But, because they are not built like traditional brick-and-mortar homes, securing modular home finance is more complex than applying for a construction home loan.

What is a modular home?

Modular homes are made up of prefabricated sections or modules that are transported to the building site and assembled. These modules are typically constructed in a factory under controlled conditions.

Once assembled on site, the modular home is then connected to services like water, electricity and sewage.

Modular homes offer great design flexibility and can be customised to your requirements.

Modular homes are not to be confused with kit homes (also known as flatpack homes). Kit homes are those where the components are built off-site, like a modular home, but arrive at your land in a ‘kit’ for assembly. In the kit are all the components needed to build the home, pre-cut and ready to be assembled.

Kit homes do not typically need to be assembled by a registered builder, you can build them yourself. But, they are usually smaller and come in set designs without the option to change the layout. Kit homes are mostly suitable for garages, small granny flats or extra storage space outside.

Can you finance a modular home?

While modular homes offer advantages, securing financing for them can be a challenge compared to traditional homes. This is primarily due to the off-site construction process. During a traditional build, a lender will value the home throughout the process. When a modular home is built off-site, this can’t be done.

That said, securing modular home finance isn’t impossible. Here are some factors to consider:

1. Loan type. A traditional construction loan is paid out in progress payments. The bank sends a valuer to your site to confirm that the construction is proceeding according to plan. But with modular homes, this can’t be done as the home is largely built off-site.

As a result, modular homes are often financed with two payment stages: deposit and competition. However, this can be a challenge for the construction company to recoup their expenses, resulting in the cancellation of the project or serious delays.

Consequently, some lenders like Bankwest have amended their construction loans to allow a third payment stage. In the case of Bankwest, this allows buyers in Western Australia to authorise a third payment for up to 95% of the land value. This protects the buyer from the construction company struggling to fund their work and assists the construction company with added cash flow to fund the build.

2. Equity from the land value. Once you have bought the land, another option for modular home finance is to use the land value as security against your loan. This means you can borrow against the value of the land to help cover the costs of constructing your modular home.

2. Family guarantor loan. You could consider getting a family member to sign as a guarantor for your loan. This means they will use equity, usually from their own home, as collateral for your loan.

4. Personal loan. Some lenders will allow you to take out a personal loan and then refinance it to a home loan once the modular home has been completed. It is important to speak to your mortgage broker about all the options available to you.

Tips for building a modular home

To ensure your modular home journey is a success, here are four tips:

1. Start the conversation with your lender early. Before you begin your modular home journey, approach your mortgage broker. You will need to explain to the lender that you need modular home finance, not funding for a traditional build or kit home.

2. Get pre-approval. Once you have started the conversation with your lender, you can apply for pre-approval. You can do this before you have signed the contract with your modular home provider. This gives you an idea of how much you qualify for.

3. Choose a reputable builder. There are several modular home providers in Australia with good reputations. Confirm that your chosen service provider has the correct certification and insurance required to build your modular home. Your lender may also want to see the builder’s insurance.

4. Gather the correct approvals. It is most important that you have all the necessary building permits and approvals before you begin your process. Delays in approvals or registration can increase costs.

Building a modular home

Building a modular home offers homeowners several advantages including quick turnaround times and increased flexibility. However, securing modular home finance can be a challenge due to the home’s non-traditional construction method.

By engaging with your mortgage broker early on, you can explore the options available to you, increasing your chances of successfully financing your modular home project.

Secure modular home finance today. Speak to Shore Financial about your finance options. To discuss your project, call us on 1300 416 700, email us on info@shorefinancial.com.au or fill in this online form.