GET A MORTGAGE when building your new home
When considering buying a home, you may want to consider the option of building a new one. This can be a great option as new homes often come with construction warranties, don’t require a great deal of maintenance, and can influence the final design. This will ensure that your new home is exactly how you want it. However, construction carries an element of risk, which can only be overcome with preparation and good management. It is important to be prepared when applying for a construction loan.
CONSTRUCTION / CONSTRUCTION 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 + Construction cost)
FIXED PRICE CONTRACTS
To assess the cost of building the property, the bank will need a copy of a fixed price contract from a registered master builder, or a list of costs if you do not have a fixed price contract. If no fixed price contract is entered into, some banks will only lend up to 60% LVR or take into account a 15% surcharge.
PROGRESS PAYMENTS
Once a bank has approved your mortgage, it will pay off the loan in a series of progressive payments. The first partial payment will be made once the bank has received a copy of the construction authorization and confirmation of the builders’ risk insurance, with bank interest noted. A professional evaluation is also required from the beginning. This will be based on the proposed plans for the building and will establish the current value of the land as well as the expected value of the property when the building is completed.
More partial payments will be made during the different stages of the construction process. The bank will require an invoice from the builder as well as a partial payment instruction signed by the client to pay each partial payment. In some cases, a progress assessment may also be necessary. Here is an example of a progressive payment schedule:
Council inspection approval required
[1] Deposit 10% Initial construction consent
[2] Foundations 10% Foundations and block work
[3] Floor, Roof and Frame 20% Drainage
[4] Block 25% pre-line construction
[5] Internal siding and doors 25% Insulation, plumbing pre-line, post-line
[6] Completion 10% Compliance Code
With most banks, the final 5% – 10% will not be paid until the Compliance Code and confirmation from a Registered Valuer that the property is complete is received.
TOP 10 POINTS
[1] Make sure you work with a Registered Master Builder who do you trust in
[2] Be sure to make a very clear construction contract
[3] understand a fixed price contract and what it means when you don’t have one
[4] Understand and ensure proper insurance coverage is in place
[5] Before you sign up for anything, have your solicitor/attorney review all documentation
[6] Use an experienced mortgage or finance broker who understands construction/construction loans
[7] Always make sure you can pay 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’re getting what you expect in terms of room size.
[9] Ask questions – Building and financing a home can be one of the most stressful things we can do, so feel free to ask questions at any time if you’re not sure.
[10] Celebrate – Through the ups and downs of construction and in the midst of all the stress, be sure to celebrate each milestone and, more importantly, the big day when you pick up the keys and can move in!
