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.
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
 Deposit 10% Initial building consent
 Foundations 10% Foundations and block work
 Floor, Roof & Framing 20% Drainage
 Lock up 25% Pre-Line Build
 Internal lining & doors 25% Insulation, pre-line plumbing, post-line
 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
 Make sure you work with a Registered Master Builder who you trust
 Ensure you draw up a very clear building contract
 Understand a Fixed Price Contract and what it means when you do not have one
 Understand and ensure appropriate insurance coverage is in place
 Before you sign up for anything have your solicitor / lawyer check all documentation
 Use an experienced mortgage broker or financier who understands construction / build loans
 Always make sure you can afford and have pre arranged a contingency fund … for the unexpected!
 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.
 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.
 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!