Knockdown rebuilds are gaining popularity with those trying to break into the property market. A question we’ve been receiving a lot is whether it is possible to demolish a house with a mortgage on it. Let’s take a closer at how mortgage agreements need to be handled when it comes to demolishing a house.
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So, can I demolish a house with a mortgage on it?
The simple answer is no. Without taking some steps you cannot just knock down a home you have a mortgage on. The key reason for this is the existing house is the collateral for your home loan should anything go wrong. If you can’t pay your monthly payments for your mortgage, the agreement allows the lender to repossess your house as financial compensation. Obviously, a demolished property isn’t going to be worth much, so lenders are not going to give up their safety net so easily.
You may think that rebuilding a new, better home would be a great solution, but that’s also not an option. The loan regulations apply to the existing property, and again, your lender isn’t just going to give up their key piece of collateral. This may sound harsh, but if it were the other way around, would you give up your main safety net for getting your money back for a loan? Yeah, neither would we.
Any demolition company worth its salt isn’t going to perform a home demolition on a house that is collateral for a mortgage without proper approvals. If they say they will, you’ve got yourself a suspect contractor on your hand which is a whole other problem to sort out.
Is there a way around this?
Yes, there may be a way around this. Odds are, you’ll need to make good on your current home loan repayments and sort out a new agreement with your mortgage lender. Once you’ve made your repayments, the old house will be your house, and you have a lot more freedom to move forward with a new construction.
You’ll still need to get all appropriate planning approval and permits from the local council and follow local regulations, however, owning your home will be key to being able to proceed.
What are the challenges involved with demolishing a home with a mortgage on it?
The biggest challenge that comes with demolishing a property with a mortgage on it is getting your mortgage company or commercial lender to go along with the plan.
By far the most common solution is paying back what you owe on the mortgage agreement. Most lenders will be willing to sort out a plan that will make this doable with your current financial situation.
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Our advice on gaining approvals from lenders
The first thing you’ll need to do is organise a meeting with your mortgage broker or lender to discuss your options. During this meeting, they’ll discuss your options and hopefully try to help you achieve your goals. The way we see it, the worst that can happen is you’ll be told no and end up where you already are. However, if it all goes well, you’ll be allowed to go ahead with the new house and maybe even get a construction mortgage sorted.
You’re going to have to accept that one way or another, you’re going to have to pay back your current lender the remaining balance.
What are the legal ramifications of proceeding with demolition on a mortgaged house without approvals?
The outlaw in you may be thinking what can the lender really do if you knock down the house? The answer is quite a bit.
Simply knocking the house down without getting approval from your lender is a breach of your mortgage agreement, and a pretty blatant one as well. Your lender will likely take legal action against you and you’ll end up in court. We aren’t lawyers, but unless there are some major extenuating circumstances, your chances of winning are pretty slim. We would be stunned if there isn’t a clause in your contract that says the house needs to be kept intact throughout the length of the loan agreement. To recoup their losses, the lender may take other assets of yours, including your car and other property.
While it may be a little scary trying to negotiate, your best bet is to talk to your financial advisor about your situation and try to sort out a solution that will please everyone.
Financing options for managing the rest of your existing mortgage
Many people in this situation are able to negotiate a deal with the lender where the plan is made to pay back the outstanding amount and a new construction loan is made to cover the knockdown rebuild. That’s the best-case scenario. There’s also the chance the lender will insist you pay back the lump sum of the loan before they’ll allow any knockdown rebuild project to happen.
An equity loan may be an option if you own land (which if you’re planning to knock down the house, we assume you do).
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