How to finance a granny flat: Everything you need to know

What is a granny flat?

A granny flat, sometimes called a secondary dwelling, is a self-contained unit located on the same block of land as a main home. Typically smaller in size, it includes a bedroom, living area, kitchen, and bathroom.

Traditionally, granny flats were once built mainly for older family members, but today they serve a wider range of uses such as rental accommodation, home offices, and guest suites.

Granny flat approval rules differ between states and councils. It’s important to check with your local council or state planning authority to confirm whether a granny flat is permitted on your property and what specific requirements may apply. For a dwelling to qualify as a granny flat in most Australian states, it typically needs to:

• Be located on the same title as the main residence
  
• Have its own entrance, bathroom, and kitchen facilities
• Comply with local council planning and zoning regulations

What are the benefits of building a granny flat?

Building a granny flat can provide both financial and lifestyle advantages. Key benefits include:

1. Additional rental income

Renting out your granny flat can create a reliable secondary income stream. This can help offset your mortgage repayments or support future investment goals. Yard’s rental income guide explores how rental earnings can boost your borrowing power.

2. Increased property value

A professionally built granny flat often enhances your property’s resale value, appealing to buyers seeking dual-income potential or multi-generational living options.

3. Multi-generational living

For families, a granny flat allows older parents or adult children to live independently while staying close to home. This can be a practical and affordable housing solution.

4. Flexible use

You can use a granny flat as a guesthouse, studio, or even a dedicated workspace, adapting it to your changing lifestyle or investment goals.

How much does it cost to build a granny flat?

The cost of building a granny flat depends on a range of factors including size, materials, and location. Most homeowners find that costs increase with the level of customisation, finishes, and site preparation required. See a list of some of the factors impacting the cost of a granny flat: 

• Location: Costs differ between urban, suburban, and regional areas due to labour and permit fees.
  
• Size and layout: Larger granny flats with premium fittings or multiple bedrooms will increase expenses.
  
• Existing infrastructure: Converting an existing garage or basement can be cheaper than building from scratch.
  
• Site preparation: Sloped land or complex plumbing and electrical needs can raise construction costs.

Understanding your financing options

When financing a granny flat, there’s no single approach that suits everyone. The right loan depends on your financial situation, home equity, and long-term goals. Below are the main options available to Australian homeowners.

1. Using home equity

If your property has increased in value, you may be able to use the equity you’ve built to help finance your granny flat. Yard’s home equity calculator can show how much equity you could access by comparing your home’s current market value with your remaining loan balance. Learn more in Yard’s comprehensive home equity guide.

2. Construction loan

A construction loan is ideal for building a new granny flat from the ground up. Instead of receiving a lump sum, funds are released progressively at key construction stages, which helps reduce interest costs. To qualify for a construction loan, you’ll need to engage a licensed builder and provide a fixed-price building contract outlining the scope and cost of the project. Check out our construction loan guide for more in-depth details. 

3. Line of credit loan

A line of credit allows you to borrow up to a set limit against the value of your property and draw funds as needed. It’s flexible but requires discipline, as interest applies to the amount of funds you have drawn.

4. Refinancing your home loan

If your current mortgage rate isn’t competitive, refinancing can free up funds for your granny flat project while potentially lowering monthly repayments. Releasing equity from your home would also require a home loan refinance. You can review Yard’s guide to refinance home loans to learn more about the refinance process.

5. Personal loan

For smaller projects or partial builds, a personal loan can be an alternative to mortgage financing options. A personal loan is not secured against your property and could be an option if you do not have sufficient equity within your home.

What do lenders look for?

When assessing a granny flat loan, lenders review your overall borrowing capacity and financial profile. Yard, a specialist in construction and renovation loans, can help you understand these requirements and the factors that may affect your eligibility. Common considerations include:

• Home equity: Lenders usually require at least 20% equity in your property to qualify for additional lending.
  
• Property valuation: A professional valuation confirms your home’s current market value and future potential.
  
• Overall financial position: Strong employment and income, and manageable household expenses and debts increase your approval chances.
  
• Credit history: A good credit score demonstrates financial reliability.

How to apply for a granny flat loan with Yard

Yard’s competitive renovation and construction loans, and flexible home equity products make financing your granny flat simple and stress free. Here is an overview of how the loan application process works:

1. Reach out to Yard and speak with our loan specialists about your building plans.
   
2. Assess your borrowing power with us. We’ll help you find the right loan type and understand how much you may be able to borrow.
   
3. Provide documentation such as your most recent 2 payslips, home loan statements, and details of your building quote or contract.
   
4. Loan assessment and approval. Our credit team will typically assess your application within two days and we can provide you with a response on whether your application is approved.
5. Settle on your loan. We’ll help you access your equity funds to get your renovation started. If you’re building a granny flat with a licensed builder, we’ll take care of progress payments directly to your builder at each stage, so your project keeps moving smoothly.

Final thoughts

Financing a granny flat is one of the most effective ways to unlock the full potential of your property. Whether you’re expanding for family or seeking rental income, the right loan can make your project both affordable and rewarding. Yard provides flexible lending options designed to support borrowers with diverse income types or renovation goals who may not meet traditional bank requirements.

For more insights, visit our home loan resources page to find more information on how Yard can help you secure the right loan for your renovation project.