GETTING A MORTGAGE when building your new home
When considering buying a home, you may want to consider building a new one. This can be a great option since new homes often come with construction warranties, do not 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:
Required Loan Amount divided by (Land Value + Construction Cost)
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 cost list if you don’t have a fixed price contract. If no fixed price contract is entered into, some banks will only lend up to 60% LVR or factor in 15% overcharges.
PROGRESS PAYMENTS
Once a bank has approved your mortgage, they will withdraw 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 the confirmation of the builders’ risk insurance, with the 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% construction prior to the line
[5] Internal lining and doors 25% Insulation, plumbing pre-line, post-line
[6] 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 Appraiser 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 develop 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 signing up for anything, have your solicitor/lawyer review all documentation
[6] Use an experienced mortgage or financial agent who understands building/construction loans
[7] Always make sure you can pay and have pre-arranged a contingency fund… for the unexpected!
[8] Measure, measure, measure – before signing your final plans, always double check that you will get 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 unsure.
[10] Celebrate – Throughout the ups and downs of construction and in the midst of all the stress, be sure to celebrate each phase and most importantly, the big day when you grab the keys and can move in!