Borrowing for building

By: Grant Clifton

With a lack of existing housing stock to buy and the overall Auckland market being short of some 40,000 homes, I have seen the building of new houses start to accelerate at a pace I have not seen before. The new government’s KiwiBuild policy aims to build 100,000 new houses in New Zealand over the next 10 years, the bulk of these will be in Auckland where demand in greatest.

In Warkworth alone, there are going to be more than 1500 new sections made available over the next 10 years. So, if you are thinking of building, there are a few things to be aware of when it comes to financing your new home. Unlike a traditional mortgage, where you buy an existing home which has a completed value, building loans are usually done in up to six stages.  Firstly, you would settle the loan for the land, which requires you to put in your deposit and the lender would then lend up to 80 per cent of the land cost. At the time of applying, most lenders will want to know what your plans are for building a house and will require a quote or estimate of the build costs from your builder. At this stage the lender will pre-qualify you to see if you can afford to borrow for the full house and land costs. This is done so you know what you can afford to spend, as it may in some cases be 6-12 months or longer before you start to build. There is no point in buying the land if you are unable to borrow to build a house further down the track.

Most lenders now require you to build on the land within two years of the purchase. It also makes sense to know what you can or can’t do budget-wise from the outset. Lenders also generally require a fixed price and fixed-time building contract from your builder. They want to know that your house will be finished on time and within budget. However, in the past two years, more and more builders are reluctant to provide these contracts and prefer labour-only contracts or charge-up contracts. Lenders will still lend but require a whole lot more information, such as a full list of all contractors being used, full written quotes for all work to be undertaken and a spreadsheet setting out all costs. They will then go through a checklist to ensure all costs have been included. They will also run these by an internal quantity surveyor or ask that you employ the services of an independent quantity surveyor to accurately access the build costs. In most cases, you will be required to get the project valued by a registered valuer based off the plans. In other words, what will the house be worth when it is finished? In some cases, the valuer will be used to do progress reports and report to the lender. Building finance can be complex, but it can be made easy by providing all the right documentation and dealing with someone who knows what they are doing.

Grant Clifton, Countrywise Financial


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