Buying and building new
When it comes to building new there are a few different types of construction contracts available and it's important you pick the right one for you.
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Deconstructing construction lending
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We’ll chat about what you’re wanting to achieve, provide expert advice and guide you through the process, then approach the right lender for your situation to get you the best deal.
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Buying off plan
Before you get down to business, you’ll want to get clued up on how buying one of these sites actually works.
Buying off-plan is a bit different to when you can physically eye up your new home. It requires a small leap of faith. You’re buying something sight unseen with a few artist impressions and written specifications to fill the void. The benefit is that they are often better value-for-money and you don’t need to fight it out each week at auctions. The challenge is getting your head around what you’re buying.
The other advantage is the deposit amount. We all know that saving for a big enough deposit to get you into the Auckland market is the biggest hurdle, but there are more lenient rules around lending for off-plan homes, and you don’t have to have a 20% deposit like you would if you were buying an existing house.
Have a look at the different types of loans you can get below, as well as the various payment structures.
Turn Key Contract
This type of construction loan is beneficial to the client, but it can make it harder for the builders. That's because a turn key contract is essentially a fixed price contract between you and the builder that specifies a fully completed property or renovation, including landscaping, driveways, painting and flooring in the new property.
Things to note:
A turn key contract only allows for minimal ‘PC Sum’ (non-fixed) costs, meaning that the costs shouldn’t blow out once construction is underway.
This contract is exempt from RBNZ (Reserve Bank of NZ) rules. That means you don’t need a 20% deposit - a 10% deposit (20% for investment properties) is required for turn key contracts, and some banks may even stretch to allow 5% in special circumstances, making this an attractive option for those with good income but less savings.
Another advantage to you the client is that until the property has been completed and settled, you don’t make any loan repayments or pay any interest, allowing you additional time to save before you start to pay off the loan.
Land and Build Contract
This is the most common type of construction loan and builders love this type of contract.
Like the turn key, it specifies completion of a ready to live in building with minimal ‘PC Sum’ costs.
Again, like turn key, these loans are exempt from RBNZ policies and therefore banks only require a 20% deposit if it’s an investment property (10% deposit is fine for first home buyers). The big difference is that there are progress payments involved. These progress payments are funds that go to the builder at various stages of the project (outlined in the table). Think of it as a 'pay as you go' approach. You start paying interest on your loan as soon as the first payment is made - which is typically at settlement of the land - and your loan payment increases as each new payment is made.
Progress payments
Firstly, a 10% deposit will be required to secure the contract. This is then included in the first drawdown. Normally paid by cash or equity.
The second drawdown tends to be 20% of the total balance of the build contract.
To give you an idea of how the entire payments might typically pan out, the rules of thumb shown in this table can be used.
| Percentage | Work completed |
|---|---|
| 5% - 20% | Site works and foundations, permits and fees, architect fees (includes 10% deposit) |
| 20% - 30% | Wall and room framing - roof installed |
| 15% - 30% | Internal and external lining, doors and windows, plumbing and electrical |
| 10% - 25% | Room fit-out and finish, kitchen and bathrooms, floor and wall coverings |
| 10% | Retention final payment made on the issue of Code of Compliance Certificate (CCC) |
Labour Only/Partial Contract
We wouldn’t recommend you sign one of these bad boys unless you’re relatively experienced in construction contracting and how it all works.
These contracts come in many forms but normally consist of a range of sub-contracts that are managed by either the client or a project manager. There might also be a labour only arrangement with the contractor.
These types of contracts are commonly used in the case of a kitset or relocatable home.
Lending for a labour only or partial contract is limited to the land value only unless the buildings are already permanently fixed to the land. LVR would typically be between 65% - 80% depending on the contract. The bank will also include a 10% - 20% contingency as these loans almost always go over budget.
Other conditions for labour only / partial contracts:
- Quotes for materials and subcontractors required up front
- Progressive drawdowns are made against invoices
- Valuations for each drawdown stage are required to ensure any cost blowouts are identified early
Conditions
Not only does buying off the plan require a small leap of faith, it also comes with a whole heap of other lending conditions. Here are some typical conditions to expect in a build loan approval:
- Sales and Purchase of the land (or the full purchase price if you are going with the turn-key option)
- Fixed price Master Builders contract
- Building/resource consent
- Registered valuation showing the value 'as is' and 'on completion'. Depending on the bank, you may need an updated valuation at each staged payment and again on completion, or you may just need a completion certificate.
The good news is that the team at Squirrel are here to help
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