Financing the build of a new home is very different to arranging finance to buy an existing one, so it is really important that you work with someone who understands all the complexities of construction loans and new home finance.
The best time to work out your finances is when you first start thinking that building may be an option for you.
By talking to an experienced Mortgage Adviser you can get an idea of how much a bank is willing to lend to you based on your budget and ability to service the mortgage.
How Much Deposit Will You Need For New Home Finance?
The good news is that mortgages for new builds are exempt from the Loan-to-Value (LVR) restrictions imposed by the Reserve Bank, which means you may not need a 20% deposit.
You could get away with a 10% deposit (20% for investment properties) making this an attractive option for those with good income but low deposit. However, while there is an exemption that applies to the construction of new builds, it’s important to note the banks also apply their own lending criteria to construction loans and may set their own maximum LVR limits.
Each bank will look at things differently whether you are a first home buyer, next home buyer or investor. For this reason, having a Mortgage Adviser on your side who has adequate expertise and experience to guide you through a successfully funded build is a must.
The other good news is if you’ve been contributing to your KiwiSaver for at least three years, you may be eligible for the First Home Grant and if it’s a new build you may be entitled to more money from the grant than if you were purchasing an existing property. There is strict criteria around this, so make sure you talk to a Mortgage Adviser first.
The Construction Contract – New Home Finance
The type of construction contract you choose will have an important part to play when it comes time to determine how much you can borrow, so let’s take a look at the common types of construction contracts and how the finance works:
Turn-Key Contract
As the name suggests, a Turn-Key contract means that you won’t pay for your new home until the property is completed, settled and ready for you to “turn the key” in the door.
You normally pay an initial deposit and when your home is ready and has its code of compliance certificate, you can draw down the rest of the funds to pay the building company, take legal ownership and move in.
The benefit to this type of contract is that you don’t pay any interest until the loan is drawn down, which is once it’s complete and ready to move in. This can really help if you are having to pay rent or another mortgage on your existing home while the property is being built.
Fixed Price Contract
If you have bought your land upfront and are employing a builder to construct your new home on it, you will usually have a fixed price contract in place.
Fixed price contracts are “all inclusive” and will set out a schedule of progress payments which you pay when your project reaches certain milestones, like when the earth works are complete, framing is up, the roof is on and of course when the project is complete.
The bank will need a registered valuation at the beginning of the project and a registered valuer’s completion certificate when the work is finished. Normally when the builder invoices for a progress payment, the bank will want to see an updated progress report from the valuer. This report is generally one page and will tell the bank what the property is currently worth and what the cost is to complete. The bank will then pay the funds out to you or the builder.
Something to be aware of with progress payments is that you start paying interest on your loan as soon as the first payment is drawn down, so as each of the progress payments are made, your loan repayments will increase. This will need to be accounted for if you are renting or paying another mortgage while your home is being built. The bank will also want to see proof of your ability to service both financial obligations at the same time, so working with an experienced Mortgage Adviser is essential here.
Labour Only / Partial Contract – New Home Finance
With a labour-only or partial contract you will need a much larger deposit. These types of contracts involve a range of sub-contracts managed by you or a project manager. You will also need to supply quotes for all materials and subcontractors upfront.
A valuation will be required for each drawdown of funds to ensure that the project is tracking as intended and will help identify any cost overruns early. These types of building contracts are best suited to those already experienced with building a new home and are limited to the land value only, unless the buildings are already permanently fixed to the land.
❗Important: When you’re signing a building contract, be sure to talk to a lawyer and a Mortgage Adviser first. Your lawyer can check that the contract is fair and doesn’t have any hidden surprises or risks. An experienced Mortgage Adviser can check that the contract will work with the lender’s criteria and with your available funds. That way you can be sure everything’s in order before committing.
Interest-only payments during construction
Most construction loans are interest-only during the build period and switch to a principal & interest loan once the home is complete. Construction loans are normally at the current floating interest rate. You can change to a fixed interest rate home loan once everything is complete.
From time to time, some lenders offer special low mortgage rates for the first couple of years if you’re building a new house. As an example, ANZ’s BluePrint to Build package includes interest rate discounts, savings on fees and potential cash contributions. Strict lending criteria applies, so it’s best to have a chat with a Mortgage Adviser to see if you qualify!
How long is your finance offer valid for?
It takes a long time to build a house. Most banks will allow up to 12 months to draw down your entire loan before they need to reassess things, so it’s really important to keep in touch with your Mortgage Adviser throughout the entire build process just in case this timeline blows out.
When Your Build Is Nearing Completion
When your home is nearing completion, you will be advised of a handover date. The handover date is where you get the keys to your house in return for final payment. It’s really important to make your Mortgage Adviser aware of this date as early as possible as there are a few things required by the bank in order to release the final funds:
- A copy of your house insurance starting from the date of handover. Your insurance must include your lender as an interested party
- A completion certificate, provided by the valuer, so the bank knows the house is fully completed
- A Code of Compliance Certificate (CCC), which is issued by the local council.
Financing a new build construction project requires careful planning and consideration.
By understanding the different financing options available, choosing the right lender and effectively managing the flow of funds, you can ensure a successful and stress-free building experience.
Working with an experienced Mortgage Adviser throughout the process will help you to monitor your progress payments and draw downs making sure you stay on track and have enough funds to complete the build.
Applications for finance are subject to meeting the lenders criteria, terms, and conditions. Refer to our website www.hbmi.co.nz for our Public Disclosure Document.
