Mortgages When Building a New Home

GETTING A MORTGAGE when building your new home When considering buying a house, you may look at the option of building a new one. This can be a great option as new homes often come with building guarantees, they do not require a large amount of maintenance and you can influence the finished design. This…

GETTING A MORTGAGE when building your new home

When considering buying a house, you may look at the option of building a new one. This can be a great option as new homes often come with building guarantees, they do not require a large amount of maintenance and you can influence the finished design. This will ensure that your new house is exactly how you want it. However, building comes with an element of risk, which is only covered by preparation and good management. It is important to be prepared when applying for a construction loan.

CONSTRUCTION / BUILD LOANS

When applying for a mortgage to build your new home, for most banks, the maximum Lending Valuation Ratio (LVR) is 80%. The following formula is used to calculate the LVR for construction loans:

Loan Amount Required divided by (Land Value + Cost to Build)

FIXED PRICE CONTRACTS

To assess the cost to build the property, the bank will need a copy of a Fixed Price Contract from a registered master builder, or a schedule of costs if there is no Fixed Price Contract held. If no Fixed Price Contract is held, some banks will only lend up to 60% LVR or make allowance for 15% cost overruns.

PROGRESS PAYMENTS

Once a bank has approved your mortgage it will then draw the loan down in a series of progress payments. The first progress payment will be made once the bank has received a copy of the building consent and confirmation of builders risk insurance, with the banks interest noted. A professional valuation is also required at the outside. This is to be based on the proposed plans for the building and is to state the current value of the land as well as the expected value of the property when building is completed.

Further progress payments will be made during different stages of the building process. The bank will require an invoice from the builder as well as a progress payment instruction signed by the customer to pay out each progress payment. In some cases, a progress valuation may be required also. Here is an example of a schedule of progress payments:

Council Inspection Sign Off Required

[1] Deposit 10% Initial building consent

[2] Foundations 10% Foundations and block work

[3] Floor, Roof & Framing 20% ​​Drainage

[4] Lock up 25% Pre-Line Build

[5] Internal lining & doors 25% Insulation, pre-line plumbing, post-line

[6] Completion 10% Code of Compliance

With most banks the final 5% – 10% will not be paid until the Code of Compliance and confirmation from a Registered Valuer that the property is complete are received.

TOP 10 POINTS

[1] Make sure you work with a Registered Master Builder who you trust

[2] Ensure you draw up a very clear building contract

[3] Understand a Fixed Price Contract and what it means when you do not have one

[4] Understand and ensure appropriate insurance coverage is in place

[5] Before you sign up for anything have your solicitor / lawyer check all documentation

[6] Use an experienced mortgage broker or financier who understands construction / build loans

[7] Always make sure you can afford and have pre arranged a contingency fund … for the unexpected!

[8] Measure, measure, measure – before you sign off on your final plans always double check that you will get what you are expecting in room size.

[9] Ask questions – building and financing a home can be one of the most stressful things we can do so do not hesitate at any point to ask questions if you are unsure.

[10] Celebrate – through the ups and downs of building and in amidst all the stress make sure you celebrate each stage and most importantly the big day when you take over the keys and can move in!