More and more people are building granny flats in their homes to add value to their property and earn additional income. Whether it is to accommodate a growing family, create a separate dwelling for family members or a teenage retreat, granny flats are seen as an affordable option to add more space to your home. Granny flats can also double up as a home office or even a revenue source for rentals for those with commercial intent.


What you should know before building a granny flat


A granny flat is a self-contained unit built on the same lot of land as your existing home. It can be either a standalone building in your backyard or as a Fonzie flat above your garage. However, irrespective of where you decide to add the granny flat, it will need to have a separate entrance to meet the regulations. 


The maximum area that a granny flat can take up differs from region to region. Whereas only 60 square metres is permissible in Perth, this goes up to 80 square metres in Brisbane. In NSW, your property needs to be a minimum of 450 square metres in order to build a granny flat.


The conditions for usage of the property also vary from state to state. For instance, it is permissible to rent out a granny flat in the ACT, Western Australia, Tasmania and Northern Territory while those in Victoria, South Australia and Queensland cannot be used to generate income. 


Here are some basic points to consider before you decide to invest in a granny flat:


  • The property must be located in a residential zone.
  • Both the main property and the secondary dwelling should be in the same owner’s name.
  • There can be only one granny flat per property.
  • The granny flat must not exceed the maximum permissible area.
  • There must be separate access to the granny flat that is unobstructed.
  • All construction, including specifications relating to floor space ratio, the height of the structure, the boundaries and other provisions, should comply with the Building Code of Australia.


In addition to these basic requirements, each state and territory has slightly different rules surrounding ancillary dwellings, including minimum lot sizes, maximum permissible floor area, and parking requirements. It’s best to contact the planning department of your local council to check the latest regulations in your state. 


In some areas, a new ancillary dwelling will also need council approval to ensure it meets the minimum safety standards. However, in other places, a private certifier is sufficient. For instance, in NSW, you don’t need council approval to build a granny flat if your property meets the minimum requirements laid down by the state.  


Financing your granny flat


How much you pay for a granny flat will depend on the type of flat you choose. Typically, you can expect to spend a minimum of $100,000 to $120,000 to get your granny flat up and running. If you don’t have that kind of cash saved up, you can consider borrowing against the equity in your house to finance the construction of your granny flat.


Equity refers to the difference between the value of your property and the money you owe on your mortgage. If you’ve been paying off your home loan consistently for a few years, or the price of your property has increased since the time you purchased it, you are likely to have some equity in your home.


An equity loan allows you to cash in your home’s equity and use it for financing the construction of a granny flat. It’s a simple process that entails a re-evaluation of the property to increase the size of your existing mortgage. To avoid paying LMI (Lenders Mortgage Insurance) you will need to keep the percentage of borrowing under 80% of the property valuation.


If you don’t have enough equity, the other option available is to apply for a construction loan. If you already have a mortgage on your property, you may have to go for a new valuation and refinance your current mortgage to include the construction loan amount for building the granny flat. 


However, increasing the borrowing on your house to finance a granny flat is also likely to increase your monthly repayments, and you need to be sure that you’ll be able to afford it.


The bottom-line


A granny flat could be an affordable way to increase your property’s value if it complies with all the local council regulations. Some experts have noted that  rental yields of up to 15% can be achieved through backyard granny flats. And best of all, they’re built quickly with most only taking 12 weeks to complete. However, it’s important to weigh the cost of building the flat in relation to your expected rental income to decide whether the investment is really worth it. 



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