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ISCOVER
The collapse of Porter Davis is just the latest in a string of home builders that have folded, leaving borrowers stranded with half-built homes. Fortunately, brokers can help where the banks can’t.
The collapse of Australian construction companies is becoming a pandemic of its own. Last year saw the demise of ProBuild, Condev, and Oracle Building Corporation. Now Canberra-based PBS Building and Melbourne-based Porter Davis have joined the list, creating major issues for the mums and dads who have been left with incomplete homes.
Rising interest rates aren’t just impacting those with a mortgage. They are having a profound impact on businesses, particularly builders that are already battling disruptions to supply chains, labour shortages, skyrocketing material costs, and fixed-price and term building contracts.
Porter Davis is now in liquidation, with more than 1,500 homes still under construction. That is 1,500 families stranded with a mortgage and no property. Given that mortgage brokers write more than half of all home loans, we can safely assume that around 750 of these stranded Porter Davis customers used a broker.
You can bet your bottom dollar that they will be calling their broker for help. And depending on how many alternative funding sources you can tap, you may or may not be able to help them.
Sean White of Paramount Mortgages confirms the large increase in borrowers seeking help: “We are seeing massive growth in customers seeking short-term finance to complete their building projects.”
Going to the bank for a top-up is an option, but in the current environment, it is unlikely to be successful. Ten rate hikes have reduced serviceability and banks are unwilling to let people borrow to the hilt like they did when the cash rate was at 10 bps.
The latest quarterly banking statistics from APRA show that only 11 per cent of loans were written on six times income or over in 2022, down 13.3 percentage points from 24.3 in the December quarter of 2021
Top-up construction finance
When a builder like Porter Davis goes under, the borrower looks for a new builder to complete the project. What usually happens is the price to complete the home is higher than expected.
On top of that, while in most cases, the borrower will have home warranty insurance to cover some of the costs associated with the failed builder, the delays in finding a new builder and processing the insurance claim can leave the borrower paying thousands of dollars in unplanned rent and other costs.
Let’s say the borrower can afford $100,000, but the cost to complete the build is $200,000. What that borrower now needs is fast top-up construction finance from a lender that is NCCP compliant. Capital Bridging Finance is NCCP compliant and provides quick loans for up to two years with minimal red tape to these customers.
Short-term finance can help all of these customers quickly fill the gap. Once the home is completed, the borrower has a greater number of banks willing to refinance their loan against the newly completed property. They don’t have to wait, paying more in rent. They can get their home built using a short-term loan.
Sometimes the exit strategy on completion may mean the property has to be sold. That’s an unfortunate outcome for the customer, but it’s far better than being left with a construction site, mortgage, and rent to pay.
John Encina, Founder and Director of Experity Capital states that “We have had a great relationship with Capital Bridging Finance for over 11 years. During that time many of our brokers have used Capital Bridging Finance to provide crucial top up funding for our client’s construction projects. In one example Capital Bridging Finance provided top up funding within 3 days for a top Sydney hospitality venue when the client’s bank was maxed out and the venue was due to open the following week. The business is now trading extremely profitably and is recognised as one of Sydney’s top venues”.
The bottom line is that more builders will go under. This is a major problem that isn’t going away in a hurry. Top-up loans are a quick fix for borrowers, but they won’t fix the root of the problem. That needs to be addressed by state and federal governments, as well as the big banks, which need to support the construction sector.
Until then, Damien Simonfi, chief executive of Capital Bridging Finance advises: “Brokers would be wise to get in touch with Capital Bridging Finance when they receive that call from an anxious client left stranded by a bankrupt home builder.”
For more information, please visit: www.cbfinance.com.au
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