Granny flat finance in Queensland: the equity you have today is not the number that matters

Whatever the reason, a lender asks 4 separate questions: will it accept the property, will it fund the work, will it count the rent, and will it lend the amount you need. A yes to one does not get you the other three. And the first number most people hear, their usable equity, is usually the wrong one. I want to explain why before you get a quote.

I had a couple, Tom and Priya, who owned a home worth around $1m with a bit over $800k owing. On today's value, the bank's 90% calculation was $900k less their current loan, leaving around $90k to $100k of potential extra borrowing before costs.

The granny flat they wanted was estimated at $190k to $200k, so today's value alone did not support the build. Priya had assumed that today's equity already allowed for the finished flat. It did not.

The second way of looking at it changed the security calculation. Once they had the builder's plans and a fixed-price quote, Westpac ordered an as-if-complete valuation: what the whole property might be worth with the granny flat finished. The valuer came back at $1.2m. 90% of $1.2m is $1.08m.

Less a loan balance a bit over $800k, that leaves about $270k to $280k of potential security headroom before fees and the bank's affordability assessment. It is not a promise the bank will lend the full amount.

The calculation I gave them is the one to remember: 90% of the accepted completed value, less your current loan balance, gives potential security headroom. The 90% depended on Westpac's professional policy in their case. The lender still assesses income, debts, plans, approvals, building contract, quote and payment schedule before deciding what it will lend.

On Tom and Priya's figures, with a bit over $800k owing and a $190k to $200k build:

The third row is a what-if, not their result. It shows how a lower completed valuation could leave a funding gap. The 90% depends on the lender and, in their case, a profession waiver; without one, 80% is the usual ceiling and the room shrinks again.

Bring this to the first conversation: the property address; your current loan statement or the purchase contract; who will live in the flat; any plans and approvals; the builder's quote and payment schedule if you have them; and your income and debts. With those we can compare the available paths before you commit.

Option 1: the equity you have today. Current property value, times the share the lender will go to, less your existing loan.

It is quick, it needs no plans, and some lenders will hand it over as a top-up or a separate loan split. The downside is that it ignores the granny flat completely. For Tom and Priya that was $90k to $100k against a $190k to $200k build.

Option 2: a construction loan on an as-if-complete valuation. The valuer looks at the existing house, proposed flat, plans, specifications and builder's quote, then values the property as though the flat were built. The bank can then assess lending against that completed value. For Tom and Priya, that changed the security calculation, but it did not itself establish what the bank would approve.

Two things go with option 2. You cannot get the valuation by saying you want to build a granny flat; the valuer needs the quote, plans, specifications and scope of works, and the bank will eventually want the building contract and progress-payment schedule. The money is normally released to the builder in stages, not handed to you in one lump sum. More on that below.

Which option you can use depends on the lender. Some lenders do not offer construction loans or exclude structural work from renovation top-ups. ING's published guidance, for example, says it does not offer construction loans and excludes structural renovations from its renovation top-ups.

Other lenders may consider an as-if-complete construction loan. That difference can matter more than the rate, so it is one of the first things we check.

Lender rules date quickly, so here is the shape of it by situation, with a lender named only where it changes the answer.

The lender gets chosen after we know the project, not before. Our Westpac review, Bankwest review, ubank review and ING review cover the wider trade-offs.

The rent from the flat does not create equity. It may help with the separate question of whether your income supports the total debt. Tom and Priya's valuer estimated about $300 a week for the proposed flat; the lender would still discount rent for vacancies and costs.

So there are really 2 separate questions. Is the completed property worth enough to support the total loan? That is where the as-if-complete valuation comes in.

And can you afford the total debt on the bank's calculation? That is where your salary, any commission, your partner's income and, potentially, the granny flat rent come in.

For rent to count, the flat generally needs to be fully self-contained: its own kitchen, bathroom and private access. The lender may use a valuer's estimate of the rent, but will usually discount it for vacancies and property costs rather than count every dollar. The bank's rental-income assessment is separate from whether the flat is lawful.

Tell us the real plan, not the plan that looks best on paper.

For a proper tenancy, the RTA treats a fully self-contained flat differently from a room that shares the main house, and the tenancy agreement can differ; your property manager or solicitor can set that up.

If the flat is going to be a rental in its own right, our investment loans guide covers how lenders treat rental income more generally. Whichever way you go, I would test the household budget with no rent at all during the build and a vacancy afterwards, and ask your accountant about tax and record keeping before you mix private and rental borrowing on one loan.

Priya is a sonographer, which put them inside Westpac's medico policy: up to 90% of the value without paying LMI, provided the eligible income was over the $90k minimum.

Without that, borrowing anywhere near 90% would have meant an LMI bill we estimated at around $15k.

Westpac's policy gave them two things to check: a higher LVR and a construction loan with an as-if-complete valuation. If you are a sonographer, a nurse, in allied health or another profession with a waiver, check the current policy before assuming you are capped at 80%. Our LMI waiver guide lists the professions.

If no waiver applies, the same two approaches still work; the maximum share of the value the lender will consider is often lower, or LMI may apply. Compare both the required cash and the total borrowing before choosing a route.

The funding position showed about $202k of room inside a $1.02m facility. That is the construction amount available in the supplied figures, not the $270k to $280k LVR-only security headroom. Against the estimated $190k to $200k build, there was little spare.

With a construction loan, the bank approves a facility and releases funds to the builder in stages. The builder reaches a stage, issues a progress claim, and the bank checks it against the agreed schedule and release conditions. That repeats until practical completion.

Interest generally applies to what has been drawn, not the whole facility. CommBank construction loan guidance explains staged payments.

Check when your own contribution is due and what the lender requires before each drawdown. A construction facility is based on the approved contract and lender conditions; the maximum available borrowing is not automatically the amount that will be drawn for the build.

Where this can go wrong is with modular and prefab flats. A supplier may want a large payment while the building is still in a factory, and not every lender will fund something that is not yet on your land. Ask the lender about that timing before you sign the building contract, not after. Our construction finance guide walks through progress payments and the documents.

The order I would do it in: get the builder's quote and plans first. If you think you are within about 3 months of starting the build, we can then get the approval in place and confirm the numbers properly.

We get the bank comfortable with your income, debts and borrowing capacity first, so the approval is subject only to the final building contract (our pre-approval guide explains what that stage does and does not lock in). Then the valuation is done or updated on the final builder documents and the construction facility is formally approved.

If the builder cannot sign a final contract until the plans and materials are locked in, ask your solicitor about a cooling-off or finance clause so you still have protection. If you change builders after the valuation, tell the bank before anyone orders a new one.

With Tom and Priya we asked the bank to send the original valuation back to the same valuer to update for the new builder, rather than start again. A fresh valuation can use different comparable sales and come back with a different number; we wanted it to stay at $1.2m.

This is usually the simplest path. A lender can treat the house and an approved granny flat as one home under a normal home loan, provided it is happy with the layout, title and valuation. If both buildings sit on one title, do not assume you can sell or mortgage the flat separately.

What I ask for early is the approved plans and final inspection or completion paperwork, because a listing can call almost any extra room with a bathroom a granny flat. We had a buyer, Russell, on an $810k home where the flat out the back had never had its final council sign-off. The first valuer saw that and came back at $740k, $70k under the price, and the lender wanted the approval fixed before settlement.

We got a building report and a second valuation of the house and land on their own merits; that one came back at $800k, and the loan settled at $640k with an extra $8k from Russell.

Nobody pretended the flat was approved; the file just stopped relying on it. A tenant already in there, or an agent's rental appraisal, tells the bank nothing about whether the flat is lawful. Our unusual property home loan guide covers the wider title and multiple-dwelling checks.

A granny flat is the smaller second home on the block. Brisbane's planning rules call it a secondary dwelling. If both homes are full sized, the council can treat it as a different type of development, called dual occupancy, with its own rules. Your council or a town planner can tell you which you are looking at in a phone call. See the Brisbane planning definitions.

Queensland let owners rent granny flats to people outside the family from 26 September 2022. That changed who can live there; it did not change the building rules.

A new flat still needs building approval, and your council will tell you whether planning approval is needed too. If the approval says family only, ask the council before you rent it out; switching to a paying tenant can mean extra fire and sound separation between the 2 homes, and a building certifier can tell you what applies.

The state rules (the Queensland Housing Code) are changing and every council is at a different point, so ask yours which rules apply to your block rather than sizing the flat off a statewide figure you read online. See the Queensland secondary dwelling guidance and the Queensland Development Code.

The valuer is not pricing your project. They are pricing the property the bank will hold as security, in its location, condition and appeal to likely buyers. A bank valuation can differ from an agent's estimate, as NAB's valuation guidance explains.

For a proposed build, ask whether the loan relies on the current value or an assessment of the property once the approved work is complete. A lower valuation can mean a larger cash contribution. Get that result before treating the builder's quote as a fully funded budget.

Ask the builder what the quote leaves out as well. Site prep, connecting services, access for delivery, drainage, approval fees and finishing work are usual gaps. An approved loan does not automatically grow when the project gets dearer; the borrower may need to cover an overrun if the bank will not fund extra work (NAB construction loan guidance).

Keep a contingency and a household buffer, and talk to us before you agree to a variation.

Send us the property address, current loan statement or purchase contract, and whether the flat is for family, long-term tenants or another use. Add any plans, approval documents, builder's quote and payment schedule you have. For an existing rental, include the lease or rental appraisal.

We will also need income evidence, your debts and household expenses, plus the savings you can contribute while keeping a buffer. With those details, we can check suitable lenders, likely funding gaps and what still needs to happen before an application or building payment.

Client examples are based on real situations. Names and identifying details have been changed.