Granny flats are the perfect way to get more out of your property. But adding a granny flat typically requires extracting equity or seeking additional finance.
Scroll down to find out what you need to know about how to finance a granny flat.
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The benefits of building a granny flat
If you’re considering building a granny flat on your property, you might be wondering how this could benefit you.
Granny flats offer great benefits to any home, some of which include:
- Accommodation for your family. Building a granny flat allows your elderly family members to move onto your property so you can take better care of them. This is also an option for students or newly married children, allowing them to have their own space while staying close to the family.1
- Passive income. Renting out your granny flat is a brilliant way to earn extra income.
- Tax depreciation. Renting out your granny flat results in depreciated tax.
- Increased property value. Adding a granny flat means your property will increase in value.
- Extra space. This is helpful not only for accommodation but if you run a business from home or if you would like to build a guesthouse or a pool house.
If you have the space and the budget, these benefits can make building a granny flat a worthwhile endeavour.
Granny flats as investments
It’s no secret that owning property is an excellent investment. If you’re not currently buying a house, building a granny flat is a more affordable way to invest in property.2
Whether you’re looking for permanent tenants or considering listing your house on Airbnb, renting your granny flat is a reliable source of revenue.
As mentioned earlier, granny flats act as long-term investments by increasing the sale value of a property. So, if you ever decide to sell, you can expect a much higher payout.7
Typical granny flat construction costs
The price of a granny flat can vary significantly depending on the size of the flat and whether you plan to build from scratch or purchase a turnkey dwelling like a tiny house.
While prices range considerably, this is a general idea of the cost of turnkey granny flats.
- 38m2 granny flat: $81,000
- 50m2 granny flat: $95,000
- 71m2 granny flat: $120,000
Building a granny flat from scratch can be less expensive than buying. Taking the former route also gives you more control over the home’s construction and design.
A building project can cost you around $120,000 for a one-bedroom, self-contained granny flat. Adding another bedroom will cost an additional $80,000.4
How do I get a loan for a granny flat?
While granny flats are less expensive than standalone houses, most people don’t have $100,000 readily available in cash. Luckily, there are quite a few financing options for your granny flat.
If you have built up enough equity on your current residential property, you may be able to use this to finance your granny flat.7
To access your equity, you can either use a line of credit loan or cash out. A line of credit is a stand-alone mortgage, meaning it can be easier to keep track of, but it may take longer to process.7
Cashing out is where you simply top up your current mortgage.
If you would like to take out a loan, the most obvious solution is to consult your bank manager or mortgage broker, if you have one.5
If you don’t have enough equity to cash out, you can take out a construction loan.7 These loans differ in that the funds become available to you in stages as the building process proceeds and payments are made to the builder.8
A personal loan is a more flexible option with shorter terms, although the interest rates may be higher.6
Alternatively, if your mortgage has a redraw facility, you can also redraw on your mortgage.6 This option is available if you have made extra payments on your mortgage, which allows you to draw some of these additional funds to finance your project.
What do lenders look for?
Depending on your lender, the requirements to qualify for a loan may differ.
Some common things lenders look for include evidence of the purpose of the loan (if it is over $50,000), a good credit score and history, in addition to stable employment with a sufficient income.7
Benefits of a mortgage broker
If you are unsure about finding the right loan for your situation, you might consider hiring a mortgage broker.
Mortgage brokers liaise between you and your lender, doing all the hard work to find the perfect financing option for you.
If you’re still unsure, here are some benefits of using a mortgage broker.
- Expert financial advice from people with experience.9
- Mortgage brokers have more flexible hours and appointment schedules than most lenders.
- Your mortgage broker will take care of any legal paperwork.
- They will provide you with simple loan comparisons to make an informed decision.
It’s important to note that even if you find that a granny flat will be a sound investment, there are non-financial factors to consider. There are plenty of people who don't want a stranger living in their backyard! So many granny flats end up as storage sheds when a house is sold to new owners.
If you’re willing to overlook this inconvenience, however, a granny flat can be a great way to pay off your mortgage sooner and earn some extra income.
If you want to add a granny flat onto your property but don’t have the funds, there are great loan options for every situation. Simply do your research and find what will work best for you.