Money – Building your own home

The past two to three years have seen the housing market in Auckland set a whole pile of new records. Record prices, record numbers of days to sell and record low stock levels. If you have had a pre-approved mortgage sitting in place, you, like many, will have found it a frustrating process to even find a house to buy, let alone something that may be suitable for your needs.

Many people are turning to buying a section and building a new home. The process can be daunting as it’s a whole new process and a much longer timeframe than buying an existing home. But the process is quite straightforward, and with some good advice you can make it a whole lot easier. I have been arranging building loans for over 25 years now and know the process very well. However, I often come across customers who have tried to arrange finance directly with their bank, only to be turned down or given the completely wrong advice. Aside from meeting all the normal mortgage-lending criteria – such as affordability, the right amount of deposit and the type of security – the lenders will look at a number of other criteria when assessing construction loans. The main points they are looking at are:

• Who is the builder? Are they a registered building practitioner and what is their reputation?
• What will the building be constructed of and to what specifications will it be built? Materials used for cladding and roofing are of particular concern.
• Is there a fixed-price contract? Does it have a price escalation clause and how realistic is the price compared with the house size and materials used?
• How long will the house take to build? Is there a fixed time clause in the contract? Lenders do not want a build to go on forever. Generally, there is a maximum of six months for simple under 300 square metre homes.
• Is it a full turnkey contract or are the owners going to do some of the work themselves? In the case of doing work themselves, do they have the skills required to do this work? If different sub-contractors are being used, who are they and what is their quote to do the work?

Most lenders do not like owner builds. However, if you can provide all the right information and do your homework with regards to all the costs, and present it to the lender in a spreadsheet format – with all quotes attached for subtrades – we can generally get finance in place easily.

Lenders are concerned mainly about price (can it be built for this cost?), who is building it, how long will it take, and finally will the new home get a Code of Compliance Certificate issued by the Council, to confirm it meets the building code.

When assessing you for construction loans, most lenders will build in a contingency amount of up to 10 per cent in case of cost overruns. They will assess your application to ensure you can borrow this money should you need to. Most banks also employ in-house quantity surveyors or may request a quantity surveyors report to look over your plans and provide an accurate cost to build. They will usually pick up any errors if the house has been priced too high or too low. They generally know what houses cost to build within 5 to 10 per cent.

Building a new home can be a very rewarding exercise. You get a new home built to modern standards and comfortable to live in. And, if you are a first home buyer and meet HomeStart criteria, you may be eligible for a $20,000 kick-start from the government to build your new home.