Broker stuffed up need advice

[billyjames]

My wife and I are FHBs and require a construction loan as we brought house and land separately and are building while we rent.

Being completely in over our heads we trusted our broker. He gave us options for banks and his recommendation - Bank of Adelaide - who we went with.

Now the stuff up was the broker told us this loan would be interest only while we built but it is in fact P&I, which is completely unsustainable. He spoke to the bank and said best they can do is lower the interest rate by 0.05% but we will have to continue to pay P&I. The first payment came out Friday.

I guess I am after advice from people who know what they are doing, because I’m certainly in over my head and have lost faith in my broker as he hasn’t admitted fault and once we signed the mortgage he became very unresponsive.

Edit: for all those on their high horses - the contract said stated P&I so we questioned the broker, he said that’s what our rate will be once construction is finalised and we would only be paying interest during the build.

Update: Spoke with my broker, they apologised and said they shouldve been more vigilant when checking as he did apply for an I/O construction loan so I guess the Bank messed up? Either way we are going to do an internal refinance with the same bank onto a I/O contruction loan (which has a slightly better rate 6.03% vs 6.09%).

For those that offered genuine advice, thank you.

 

[dcarrington]

@billyjames The difference between interest only and p&I are only a few hundred dollars to begin with.

Hopefully you can survive the 5 or 6 months while the house is built but unfortunately the payments aren't going to get any easier.

 

[jezzelaine]

@dcarrington I'm guessing the impost here is more to do with paying P&I as well as rent during the build which is causing the servicing issue.

You absolutely can have IO repayments on the construction loan, the bank may structure it as a P&I loan against the land and IO against the build.

If the bank/broker aren't willing to budge there's no harm in speaking to another broker. But it might be a challenge refinancing once construction has already started.

 

[jrbauco21]

@dcarrington 5 or 6 months? Hahaha. Not even close.

 

[ivyandroses]

@dcarrington 5-6 months? Hahaha NO

 

[resjudicata]

@dcarrington Could be a lot longer that 6 months

 

[koroman]

@dcarrington Did you drop a 1? More like 15-16 months

 

[dcarrington]

@koroman I'm currently building and the estimation is 5 months.

 

[koroman]

@dcarrington Double it and you'll be closer to reality as others have said - every builder tries to generously underestimate to get you to sign.

 

[marystites]

@billyjames Check for anything in writing, including emails to/from the broker. Check your mortgage contracts, that you presumably read before you signed. There’s also usually a box to tick asking if you sought legal advice or declined it before signing those contracts. If you’ve got a leg to stand on, you can lodge a complaint to/about the broker or the bank

It’s been a while since we built our house but the construction loan was drawn in stages, the loan amount owing getting higher as the build progressed and got closer to completion. Interest only loans are at a higher percentage rate than P&I so it might not make a huge difference to your cashflow but it’s only the difference in what you should be paying to what you are paying that you can really claim as a remedy. If it’s not much of a difference it could be a case of sucking it up for the next few months to just get the built L’s finished and move in, and you’ll have paid off a little of the principle along the way.

 

[sanders1031]

@billyjames The credit contract absolutely would have specified IO or P+I, should have read your loan documents.

 

[lightdreamer]

@billyjames Caveat: I don't really know wtf I'm doing as my wife and I are also first-time buyers/builders. We also purchased the land separately and are currently in construction phase.

As per your brokers advice, and my understanding/experience, you should have two separate loans: one P&I loan for the land, and one IO for construction that is paid out in 5-6 stages (ie. you only pay interest on the amount you have actually drawn-down). Presumably these two loans are both with BOA. This is standard practice and I would be surprised if BOA does it a different way.

The confusion is most likely this (I made a complaint the other day to our bank as it is confusing):

The interest rate applied to both loans will be the same. However, the bank calculates serviceability based on the required P&I payment after construction is completed (ie. the full amount = land + build).
In my banking app the IO loan shows as P&I (which kinda makes sense because they are essentially the same loan), but the minimum required monthly repayment for the construction component is based only on the interest payable on the amount presently drawn-down.
Once construction is complete, the two loans will be consolidated as a single P&I loan.

TLDR: Construction loans are complicated, even for brokers.

 

[lindseym1013]

@billyjames Change the title to “we stuffed up”

A broker is a middle man between you and the bank. It’s still your responsibility to read everything and make sure it’s correct.

I’m sure if you go back and read the contracts YOU signed it’ll show it’s IP not IO

 

[foulendeparis]

@lindseym1013 Then why do brokers have PI insurance. My broker didn’t give me the option to lock in a fixed rate and I didn’t know it was an option.

Loan settled for a much higher rate. I complained to the owner and they covered the incremental interest $XX,XXX for the length of the fixed term on the condition we don’t make a PI claim

 

[zondaar39]

@billyjames Sorry to say, I agree with everyone read your contract carefully! I recently signed with Adelaide bank and they directly specify P&I or IO, length of IO & your rate all on the same page. I made them regenerate the contract when they stuffed up and gave me the wrong fixed rate & length.

 

[aftergodsheart]

@zondaar39 Ummm bro, you should check your privilege. You are clearly privileged because you chose to read the contract of the most expensive personal asset as opposed to not reading it. OP is less privileged automatically and the bank and broker should thus refund the loan, pay his rent and then gift him the newly constructed house for free.

/S obviously

 

[ged]

@billyjames Interesting, I recently looking into construction loans and they were all structured interest only for construction stages and then p+I after handover. Weird that it's p+I from the get go

 

[freshgrow191]

@billyjames Agree, very difficult to refinance to another lender once a lender has partially funded the loan. There are a couple of low doc lenders that can assist but their interest rate will be well over 7% and I don’t think there would be much difference in repayments.

 

[sinaloapaisa]

@billyjames It should only be P&I for the land but interest only for the build? I've not heard of P&I for a build before..

 

[hales13]

@billyjames The land loan will be P&I and construction loan will be IO, that's standard unless you're building an investment property in which case land can sometimes be IO also.

To be honest there is a very marginal difference between P&I and IO repayments at the start of a 30yr loan term anyway so if that's putting you in financial distress, you were on a knife edge anyway.

Sounds like your broker may not have explained it clearly enough but blaming them is a bit of a cop out in this situation.