Finance, stripped! Secrets from the experts, revealed.


Granny flats are a no-brainer in today’s property market but, how do you achieve one? Who really knows what finance option is best? We have teamed up with finance expert, Raymond Teh to clear the misconceptions about granny flat finance.


So, we have been saying this for years, but we will say it again. Granny flats are undeniably the solution to Sydney’s current property market. Last year alone, over 10,000 granny flats were built across the country. Of that number, New South Wales lead the pack, building a whopping 6,065 granny flats.


*Data from HIA No one looks after Granny better than NSW.pdf

You may be thinking ‘Why’? Let’s break it down. There are three major factors causing this granny flat inflation across the state. The first being our current property market & the difficulty first home buyers face entering the market. The combination of the expensive renting prices, tightened regulatory lending criteria by the banks and the stable housing prices despite the recent 10.9% drop (in Sydney), are seeing young Australian being priced out of the market. This has resulted in them staying at home with mum and dad for longer than expected while they try to raise that 20% deposit towards freedom.


While alleviating financial pressure during this time is great, multiple adults living under one roof can be challenging. Self-contained granny flats have proven to afford privacy for both parents and children and often generate a new revenue stream for the parents after their children have moved out.


Speaking of revenue stream, investors are another key player in the granny flat growth. Whether it is an extra source of income on an existing investment property or a homeowner piggybacking off the increasing popularity of platforms like AirBnB, granny flats can achieve a few hundred dollars extra rental income per week, effectively paying itself off in about 6 years and boosting the property value by 30% according to CoreLogic/Archistar.


The oldest issue that generated the name ‘granny flat’ is Australia’s aging population. With many grandparents living for longer but still demanding their independence, granny flats have been affording many families with the ideal solution, keeping them close enough for safety and far enough for independent living. It’s a win-win for everyone.


We know, amazing right? Fear you’ve missed out on the boom? Don’t fret! CoreLogic and Archistar released a report stating that the country has the capacity to introduce over half a million new granny flats. Yes, half a million! The below table shows the top 20 suburbs in Sydney with the greatest number of properties with the potential for a granny flat. Could your property be one?


*Data from CoreLogic Archistar Granny Flats June 2019.pdf


It’s obviously a good idea, but now onto the ‘How?’. Let’s get down to basics and remove the finance jargon that no one understands.

  1. Interest rates are set to drop.

Now is a great time to take out a loan for a granny flat. Assuming 4% interest rate & a $120,000 granny flat, monthly repayments will drop from $572/month to $555/month when making principal & interest repayments. In the case where you have interest-only repayments, $400/month will drop to $375/month.

2. What is ‘serviceability’ and how has it changed?

According to Canstar, serviceability is “the calculation of whether a borrower can afford the repayments on a loan, after other expenses and income are taken into account.” Previously, the banks were calculating if the borrower could afford the repayments at an interest rate of between 7.00% – 8.00%, not the actual interest rate payable. This assessment rate is likely to reduce to 6.50% in coming months, meaning that an average borrower’s borrowing power will increase by 5 – 10%, making obtaining a loan for a granny flat easier.


You have heard us talk about granny flats & first home buyers. Need us to explain it a little more? Sure! We’ve already discussed parent’s paying and building a granny flat for their adult children to live in while they save for the 20% loan deposit. The other side of this equation is if the children want to pay for the granny flat to be built on their parents’ land. Is it possible? Yes! Here are the ins and outs explained simply.


Can you take out a loan to build the granny flat on your parents’ block?
Yes, however the child needs to purchase a portion of the parent’s land. This portion needs to be at least 10% and effectively will mean that the child will be on the land title. The children and the parents must borrow the funds together.


What is the First Home Owner Grant and does it apply to granny flats?
The First Home Owner Grant is a government initiative to assist young Australians buying or building a home. It is a one-off payment of $10,000 to eligible first home buyers who purchase or build a residential property to live in. The good news is that, yes it does apply to people building a granny flat in their parent’s backyard, as long as the child owns at least 10% of the property.

How long do you need to live in the property?
The child will need to live in the granny flat for at least six months. After that period, you are free to rent out the granny flat.

How much of a deposit do you need to build a granny flat?
You may not need a deposit because lenders lend money based on the value of the main house and granny flat. The key is you must have a part-ownership of the property and all owners must get onto the mortgage.

There is a magnitude of finance options available in today’s competitive market. If you are at the stage where you’ve decided you want to build a granny flat, then take the next step! Make an appointment with your mortgage broker and investigate the best options for you. Raymond Teh and his team are some of the best in the business and offer skype calls if you have a busy schedule and limited time to meet face to face. Give them a call and get your future sorted today.