The process of building your very own home can be a bit intimidating, especially when it comes time to pay for it! There are differing requirements between banks and lenders. You are probably aware that for a standard home loan, banks will generally need a 15%-20% deposit. But the requirements are a little different when building.
So, let’s take a look at what you need to know about financing a new build.
Work out your budget
Taking out a mortgage for a new build is not subject to the Reserve Bank loan-to-value restrictions. That means you might be able to get a loan with only a 5% or 10% deposit.
Unless you are paying cash, you will be borrowing against the final value of the finished house. This is the standard way of funding a new build. The general rule for the average cost of a build is about $2,500 per square metre.
Do your calculations and work out how much you have to put towards the construction. A realistic budget that you can actually stick to is important. This is especially important if you are renting while building, as your expenses will be that much higher. Also take into account that building generally takes longer than you expect; delays due to weather, materials being delivered late and availability of contractors can easily affect your timeframes.
Financing your new build
The terms of a construction loan may differ slightly between lenders but generally speaking, the loan is paid out in stages. You will have a contract with your builder, which describes the payment terms and schedule. The build will have to be inspected at the end of each stage to ensure the work has been done and has met the value for that stage. The money is generally paid directly to the builder. Your deposit will be used first before the loan starts covering costs.
It can take quite a while to have a house built and for it to be ready to move in to. If you are still paying rent or making repayments on your existing home, you might not get the home loan approved if you don’t have enough income to cover both loans and the interest during the building process.
You might also struggle to get approval if you are not planning on selling your existing home. You might plan to rent it out after you move into the new place, but the bank usually won’t approve a loan on that basis, as you don’t have that income yet.
Because there are a few different challenges and loopholes when building a home, talking to a mortgage broker can be a very good idea. Brokers that specialise in building projects will have invaluable experience and will be able to get you the best loan for your situation.
Other tips to consider
Insurance – you will need to arrange construction insurance for the duration of the build process. This should cover site damage from natural disasters, theft, fire, or construction issues. A lender will need to see a certificate of insurance before they release any loan funds to the builders.
Guarantees – some lenders will also require builders guarantees to be in place before approving a construction loan. These guarantees protect consumers by ensuring work will be done on time and completed properly using quality materials.
Getting independent advice – the information in this blog is intended as a guide only. You should ensure that you get your own advice from an independent professional. Make sure you know upfront what your budget, costs and obligations are, and when the bank will release funds. A bit of time spent now, can save you a lot of headaches further down the track!
Need information on your development?
Planning a new build can be daunting as there are lots of steps to complete before a foundation can even be laid. If you need help with the relevant resource consents, then get in touch with us here at Planning Plus for a no obligation discussion.
As with all our blogs, the information detailed here is general in nature and meant as a preliminary guide only. This should not be substituted for your own investigations or use of your own professional’s.