Soaring Construction Costs Impact Home Loan Amounts and Borrowing Ability

How Escalating Construction Costs Are Affecting Home Loan Amounts, Project Budgets, and Borrower Capacity Across Australia

As Australia’s construction sector faces a sharp rise in costs, the broader implications for homebuyers, borrowers, and the housing market are starting to unfold. The latest results from CoreLogic’s Cordell Construction Cost Index (CCCI) reveal that construction costs increased by 3.4% in the past 12 months, the largest jump since 2023. Rising construction costs affect important components of the housing market, including loan amounts, construction budgets, and borrowing power, and pose problems for borrowers looking to find money for new builds or renovations.

Impact on Loan Quantities and Loaning Volume

Meanwhile, building prices are growing, so borrowers will want more cash when financing new houses or even improvements with a loan. This will have an impact on their borrowing capabilities (lenders may tighten requirements as rates rise). Borrowers may also face stricter loan-to-value ratios (LVRs) or be required to put down a larger deposit, limiting the amount they may borrow.

This tightening of loan rules may be tough for first-time homebuyers or those with little equity. Higher overall project costs demand greater credit amounts to finance the projects, making loans more difficult to get.

Challenges in Securing Funds for New Constructions or Renovations

Higher construction costs will force many borrowers to change their budgets. And already, builders are paying tighter margins and passing some of this onto their customers. And homeowners often have to scale down their ambitions in order to keep costs within reason, by using cheaper materials or cutting back on their projects.

While some financial institutions are providing more flexible financing, rising prices sometimes force borrowers to seek alternative sources of capital or revise their development plans. Such items might cause financial delays and worry as people try to stay within their budgets.

Borrowers will find that in cases where loans are already approved, their initial budgets do not support the total cost of their projects. It may make them have to think again about that financing or delay construction until they can put their hands on more funding

Regional Variations and Their Effect on Borrowing

Rising construction costs have different effects from region to region. For example, Queensland had the largest increase in costs, and New South Wales had a more modest increase. The total amount of the loan necessary varies from region to region, and higher construction costs in some areas will make the prices go up even more.

Across Australia, homebuyers and borrowers are being reshaped by rising construction costs. In a climate of tightening lending criteria and increasing project costs, borrowers will need to be careful, review their budgets, and consider other sources of funding in order to successfully negotiate this challenge.

OM Financials is ready to help borrowers who are looking to deal with the increasing construction costs and find the right financing for their new buildings or remodeling projects.Whether you're seeking a home loan or need tailored financial advice, our team is ready to guide you through these changing times.

Book a free Chat for Om Financials.