Building a home is quite a different procedure financially than buying a pre-existing home. And with this in mind, it's great to go into the building process knowing what you can afford and what will work for you.
There are a few different loan types specifically for building. They are as follows:
FIXED PRICE CONTRACT
A Fixed Price Contract is where a builder provides a single fixed price to complete a build deal. The contract is “all-inclusive.” Your builder will manage the whole building project including getting consents, working with architects/designers and organising all subcontractors. Your builder will also negotiate with the sub-contractors on price, materials and completion time. Thus taking over all management until the code of compliance has been issued, then you will have a property for the bank to use as security. It’s important to find the right builder for your project, one who will build a quality home on budget.
If this option sounds like the right step for you, your mortgage broker will work closely with you helping and advising on steps and processes that will need to be considered before building starts.
BENEFITS OF FIXED PRICE CONTRACT
- Builder project manages until a code of compliance is issued
- Builder organises consents and deadlines with sub-contractors
CONSTRUCTION LOAN
A Construction Loan is a short-term loan used to pay for the building of a house, normally a term of 12 months. As work progresses, money will be paid out in stages as it's needed. These stages are normally set out before construction begins. Stages such as foundation being laid, framework going up and so on.
This means that you’re only paying interest on the money that’s being paid out, instead of paying interest on the whole lot straight away. Allowing you to have more money to pay rent and other bills before you move into your new home.
To receive a construction loan your bank will require a 20% deposit, but in some instances, you may still be able to receive a construction loan with a 10% deposit. Banks will require a strong application (income, credit history, bank account conduct) to approve a loan with a 10% deposit, this is done case by case.
BENEFITS OF A CONSTRUCTION LOAN
- During the project, you only pay interest on the money already paid out.
- A construction loan is usually on a floating interest rate, which is great if the current interest rate is low.
LABOUR ONLY/PARTIAL CONTRACTS
This form of contract is only best for those experienced with the ins-and-outs of construction, not for a first home builder. These contracts are normally a range of sub-contracts and are either managed by you or a project manager. They are best suited for kitset or relocation homes.
Progressive payments will only be paid out to invoices you already have. These are always required to obtain quotes for materials and all sub-contracting costs upfront.
These contracts are limited to the land value only unless the buildings are already permanently fixed to the land. The LVR (Loan to Value Ratio) would typically be between 65% - 80% depending on the contract. The bank will also include a 10% - 20% contingency as these loans almost always go over budget.
BENEFITS OF LABOUR ONLY/PARTIAL CONTRACTS
- During the project, you only pay interest on the money already paid out.
We recommend meeting with your mortgage broker to discuss which home loan will best suit your needs.