How to Finance a Granny Flat

grandparents living near family in a granny flat

Granny flats are independent dwelling units on your property that offer the same comfort as a regular home. They have become modern and artistically designed abodes from just a garage or shed conversion. They can be the new residence for family members, or you can rent them out to earn rental income.

If you are looking for a home loan to finance your new granny flat, it is best to consult your mortgage broker to find a suitable option for you. Generally, you can use the equity you’ve built up in the existing house to finance the addition. There are various options you may look into when finding a loan to finance a granny flat.

Ways to Finance Your Granny Flat

There are two ways you can fund the construction of granny flats which are:

Accessing the Equity in Your Existing Property

The difference between your property’s market value and what you owe on your mortgage is your home equity. It grows as you pay down the loan, so if you’ve owned your property for a few years, then you might have enough equity built up to finance this addition. However, most banks lend only 80% against your available equity. That means if your property’s current value is $500,000 and you have $300,000 mortgage on it, then you get access to only $100,000 ($500000 x 80% – $300,000= $100,000).

Again, you can access your home equity in two ways: use a line of credit or cash out. It is easier to track the money spent against your granny flat in a line of credit than in a cash-out as it is a separate mortgage. But, a line of credit will be more time-consuming as the lender will have to assess your new application and documents that you must submit. Conversely, a cash-out doesn’t require as many documents as you are already an existing customer. Moreover, as long as you don’t go over 80% LVR, banks are less likely to control the funds. You don’t have to state a specific purpose and declare the cash out as an equity release for future investment provided that your home loan does not go over the Lenders Mortgage Insurance (LMI) threshold. This is probably the easiest option to finance a granny flat.

Using a Construction Loan

If you do not have enough home equity to borrow against, or you want to explore other options, a construction loan may be the way you are looking for. A construction loan is more complex than the cash-out option, and the funds will be given to you in parts as progress payments for the builder as the construction goes on. Additionally, the banks will require proof of rental demand in the area and evaluate the value of the granny flat upon completion. However, please note that lenders assess your rental income in different ways. 80% of the rental estimate is acceptable for some, while others may allow 75% of the rental income when analyzing your borrowing capacity.

How can I Qualify for a Granny Flat Loan

In general, it is relatively easier to qualify for a home loan to finance a granny flat if you have sufficient equity in your existing property and enough income to pay the new loan. However, there are some factors that you need to be aware of.

Loan Amount

You may not be required to present evidence of the purpose of the loan to the banks if you take out less than $50,000. If you access more than $50,000, most lenders need you to declare the purpose of the funds.


Lenders are more flexible when you borrow less than 80% LVR and may waive the evidence of the purpose. However, if you take out more than 80% LVR, the banks want to know what the money will be used for, i.e., they want to control the funds. Furthermore, you will need to show the following to qualify.

The lending criteria vary from bank to bank and lender to lender, so you must be cognizant of what they look for in a borrower before applying for a mortgage.

Get the experts on your side! Please call us on 1300 227 566 or enquire online, and our experienced mortgage brokers will assist you with your granny flat investment.


Kiran Thapa

Seema Lama

More related topics:
Becoming a Second-Home Buyer
Even for people who love their primary residence, a secondary property can be a significant future investment.
What You Need to Consider Before Building a Granny Flat
A granny flat is a secondary dwelling on your property, detached or attached to the main house. Even though the name ‘granny flat’ suggests a place for the elderly, it has now become more than that.
What is a Guarantor Home Loan?
With pressure growing for young Australians to become first home buyers, a guarantor home loan can help them start their homeownership journey.

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