One of the considerations for choosing
a particular type of property might be
the stamp duty and servicing costs payable
One of the advantages of buying a house and land package is that the contract is in two parts, and stamp duty is levied on the land component alone.
Once the land is registered and settled, ownership is transferred to the investor. The building plans are then stamped in the new owner’s name, a process that may take up to 6 weeks or longer, depending on the particular council process.
The house is then built in stages generally over about 6-9 months. When you allow for council permits to be issued, the build process and then occupation certificates to be issued at the end of construction, and allowing for delays due to inclement weather, a house and land package can take up to 12 months or more to complete.
Typically, the stages for house construction and the percentage progress payments are:
One month after the land settles, the lender will require interest to be paid on the portion of the loan that has been drawn down to date. As the build progresses through the stages, the lender funds more progress payments, the outstanding balance grows, as do the repayments.
Servicing the debt while a house and land package is built is like making mini mortgage payments. These payments become progressively larger until the first full mortgage installment is due one month after the final progress payment has been made.
Assume a house and land purchase in Qld, for $430,000:
1.Land component $200,000
2. Stamp Duty on the land = $5425
3. House contract = $230,000
4. Borrowing 100% of the purchase price (costs covered by buyer)
5. Interest-only loan at 4.5% pa.
*Note: It is assumed for the sake of a working example that the stages of building happen in discrete months – in reality, some steps may happen more quickly or more slowly.
When we consider the difference between purchasing a single or a 2 part contract of the same value:
*using an example of Qld stamp duties
Had the purchase been a single contract at $430,000, the stamp duty would have been levied on the entire purchase price = $13,475
The house and land duty payable on the land is $5,425, but the debt has to be serviced during construction bringing the total outlay to $14,916
It’s worth noting that the interest costs vary for a host of reasons, including monetary policy to smooth the business cycle. Currently, the total interest cost to fund the construction would be significantly lower due to the record low current interest rates.
In contrast, stamp duty rates are not dialled up and down as conditions in the economy and housing market change. As a result, in a low-cost credit climate, 2 part house and land contracts may be even more cost-effective and attractive given the relatively reduced initial outlay.
The land value and the proportion of the land in the overall package price will also vary from place to place as do stamp duty rates and therefore the comparative affordability of a single contract compared to a 2 part, house and land construction will differ.
Stamp duty and interest during construction are offset against capital gains tax obligations when the property is eventually sold.