As suitable properties to purchase become harder to come by, more and more people are looking at the option of buying land and building their own home. Anybody who is looking to finance the construction of a new home, may be able to obtain a loan up to 90% of the build cost as long as the borrowing is purely for that project without any additional expenses. In most cases a “fixed price” contract will need to be provided from a Registered or Certified builder with details of “staged” payments, indicating at what part of the build process payment will be required.
It is important to note though, that building/construction loans work quite differently to normal home lending products. Borrowers will require some equity before they start, either from cash reserves or value in the bare land owned. Dependent on the services (power & water) available to the section, banks will initially lend up to 50-75% of the land value to allow access to funds to pay for initial expenses, such as the deposit on the contract and any initial engineering works or council consent costs. A registered valuation will then be required prior to any building work being commenced, to determine the value of the property as it is and as it will be upon completion of the contract. Based on the expected finished value, a loan amount will be approved but access to funds may be limited until further ‘progress’ valuations are carried out to provide an acceptable current security value of the property and estimates of the cost to complete the build. As long as there is enough value in the property relative to the work carried out on the building, then lenders will generally advance up to the percentage level of their original approval to allow for payment upon receipt of builders invoices, retaining enough funds for completion of the project.
We suggest that in the beginning stages that you try and use as much of your own saved funds towards the building project as you can. Avoid purchasing items that won’t add value to the property at the beginning (there will always be some great sale on at some stage, so try and leave those purchases until the end of the build, once you are certain that you have available funds!). It can be quite handy to have a credit card available for those essential purchases that you will have to buy to personalise your home, but interest free or deferred purchase options can often work out more cost effective in the short term if you don’t have spare cash. Once the building is completed and the Code of Compliance has been issued your lender is may be open to increasing the percentage that they will lend to and possibly go up to as high as 90% of the final value.
Whatever level of borrowing is called for, you really need to speak to your mortgage adviser first to discuss when you can access the funds and to make sure you have loan approval in place before you commit to signing the contract.
