When considering a building project there will be many restrictions and obstacles to overcome when wanting to finance your build.
Lenders perceive financing a building project to be a higher risk than financing the purchase an existing house resulting in different lending criteria for builds. There are many things that can go wrong with the building project that could result in insufficient funds to complete the build OR other obstacles that could impede completion. In most building projects there are cost overruns ie a client will spend more than they originally thought it would cost.
It is for these reasons that the lenders will ask for more conditions to be satisfied before advancing the funds to cover the building project.
The lender wants to know that when the building project is complete there is sufficient value in the property to support the loan and that the loan will be sufficient to complete the build and they want to know that the funds they advance will be used to complete the building project. It is for this reason that the lender will ask for a registered valuation on the property before building commences showing the value of the property as it is now and as it will be upon completion of the building project.
The lender will consider the value of the property as being the value of the land PLUS the cost to complete the project OR the registered valuation of the property upon completion – WHICHEVER IS LESS! For example – you get a registered valuation on your section before you start to build and it values to say $200,000. The cost of the building is $250,000 (inclusive of GST). The total value of the property is deemed as being $450,000. However if the registered valuation on the property upon completion comes in less than the $450,000 say $440,000 then the $440,000 is the value that the lender will work off. This can obviously be a real problem if a client is borrowing funds to a high percentage over the over the property.
A lender will advance funds for the building project on a “Progressive payment Schedule”. When using a fixed building contract (ie the builder has committed to a contract price) the lenders will generally advance funds equal to the invoice that has been presented. In other words the builder does the work and then presents the invoice to the client who then sends that to the bank and the bank will advance sufficient funds to cover that payment.
Upon completion of the building project before advancing the final progress payment the bank will want to check the building is completed. They will ask for a Valuers’ completion certificate where the valuer confirms that the property is indeed finished. They will want to see the Code of Compliance ensuring that the building is up to Code. Finally the bank want to ensure that there is sufficient house insurance in place with the bank noted as having an interest in the property so they will request confirmation that this is in place
