Knock-Down Rebuild Finance: What You Need to Know Before You Start

Love your street but not your house? A knock-down rebuild lets you stay in the area you know, keep your block, and end up with a brand-new home designed around how you live now. It's become a popular option across Melbourne's south-east, where established suburbs have good-sized blocks and older homes that are expensive to renovate.

But financing a knock-down rebuild is different from buying a home or doing a renovation. There are more steps, more costs, and a period where your property is effectively worth less than it was. This guide explains what to expect before you start.

A knock-down rebuild is usually financed with a construction loan. The lender looks at two things:

• The value of your land, once the existing house is gone
• The cost of the new build, based on your fixed price building contract

The loan is then released in progress payments as the build goes up, just like any other construction loan. If you're new to how that works, start with our guide to progress payments in Victoria.

If you already have a mortgage on the property, that existing loan is usually refinanced into the new construction loan, or kept in place with the construction loan added alongside it.

Here's the part that surprises many homeowners. When you demolish your house, the lender no longer counts its value. Your property is valued as land only.

For example, say your home is worth $1.4 million, with the land worth $1.1 million. Once the house is demolished, the lender treats the property as worth $1.1 million until the new home starts going up.

This matters because it affects how much you can borrow and when. Lenders look at the "on completion" value as well, which is what the property will be worth with the new home built, but the land value is a big part of the calculation at the start.

A broker can help you understand how different lenders assess this, because policies vary.

The building contract is the biggest cost, but it's rarely the only one. When you budget for a knock-down rebuild, make sure you include:

Before the build

• Demolition, which can range widely depending on the size of the house, access and whether asbestos is present
• Asbestos removal, which is common in homes built before the 1990s
• Disconnection of services, such as gas, electricity, water and sewer
• Soil tests and site surveys
• Planning and building permits, and any council fees
• Design and drafting costs, if you're not using a builder's standard plans

During the build

• Somewhere to live, usually rent for 9 to 18 months
• Removalist and storage costs
• Loan repayments, on your existing mortgage plus the construction loan as it's drawn

After the build

• Landscaping, driveways and fencing, which are often excluded from the building contract
• Window coverings and floor coverings, depending on the inclusions
• Reconnecting services

Many people leave these items out of their budget and end up stretched at the end of the build, when they're also paying rent. A clear budget from the start helps you avoid that.

Some builders include demolition in their contract. Others ask you to organise it separately. If it's separate, you'll often need to pay for it from your own funds, because many lenders won't release money until the building contract is underway.

Check this early. It affects how much cash you need upfront.

To approve a knock-down rebuild loan, lenders usually ask for:

• A signed fixed price building contract with a registered builder
• Council-approved plans and specifications
• A building permit
• Demolition permit and quote, if demolition is separate
• Domestic building insurance from the builder
• Evidence of your income and current debts
• A valuation of the land and the "as if complete" value

Lenders also assess whether you can afford the repayments while paying rent elsewhere. That's an important part of the application, and one reason it pays to have it structured carefully.

Timing is one of the trickiest parts of a knock-down rebuild. A typical sequence looks like this:

1. Get pre-approval, so you know your budget before you commit
2. Finalise your design and sign the building contract
3. Obtain permits, which can take several months
4. Arrange formal approval of the construction loan
5. Move out and organise rent and storage
6. Demolish the existing home
7. Build, with progress payments released at each stage
8. Handover and move back in

The gap between signing the building contract and the build starting can be longer than people expect. Permits, site works and builder schedules all add time. Keep in mind that loan approvals usually have an expiry date, so your broker should keep an eye on that.

There's no single right answer. A rebuild often makes sense when:

• The existing home has structural issues or needs major work
• Renovation costs are approaching the cost of a new build
• You want a different layout, more bedrooms or better energy efficiency
• Your block can fit a larger home, or even two dwellings

If your block is large enough, it may be worth asking whether a dual occupancy or duplex is possible. In that case, you'd be looking at development finance rather than a standard construction loan, and the numbers can look very different.

Sometimes, after doing the numbers, homeowners decide to buy an existing new home instead. If you need to buy before you sell, a bridging loan can help cover the gap.

And if you're staying put but your current loan isn't competitive, it may be worth reviewing your options through refinancing before you start the build.

A knock-down rebuild brings together refinancing, construction lending and careful cash-flow planning. Getting the structure right at the start saves a lot of stress later.

Our team at Ridge Finance can help you:

• Work out a realistic total budget, not just the build price
• Compare lenders on their construction policy and valuation approach
• Plan how your existing loan and construction loan fit together
• Manage progress payments so your builder is paid on time

We help homeowners rebuilding across Melbourne's south-east, including Bentleigh and Mount Waverley, where knock-down rebuilds are common.

If you're thinking about a rebuild, book a free chat and we'll help you work out whether it stacks up.