Article by Bruce Patten – Loan Market
Considering building in 2020? Getting the right loan is crucial.
Don’t get caught with the wrong lender for your next building project.
If your New Year’s resolution is to build a new house, It is important to ensure you find the right lender for your project. Every lender has different policies for construction lending so how do you make sure you find the right one? Let us help.
Each lender has different policies when it comes to new builds, these differences can have a big impact on your final mortgage and your ability to build the home you want.
Let’s take a look at how various banks constructions policies vary and how it can impact you.
Lending rules and your deposit.
Firstly new builds are exempt from the Reserve Banks (RBNZ) Loan to Value (LVR) restrictions which impact the size of the deposit you need. This exemption includes purchase types such as land and build packages, buying off the plans and turn-key purchases.
Lenders however, still have their own internal lending policies to adhere to.
These policies differ between banks and impact how they will access your lending and the size of the deposit you need for an investment property or your own home.
For an owner occupier there are lenders who only require a 5% deposit, however others will require 20% or more, depending on the borrowers circumstances and plans (i.e. whether you are buying a turn-key property or looking at a land and build package).
For example, if you plan to build the house yourself or use a labour only contract with a builder your lender will most likely require a bigger deposit, along with the number of other conditions to be met. These conditions and deposit requirements can vary significantly between lenders for these types of builds due to the higher risks and complexities, so it pays to look carefully at your options here.
All banks require a registered valuation of the “as completed value” prior to the build starting, based on the build contract and specifications. Some banks and lenders also require further valuations during the build, where others don’t – which could save you money.
Some banks will also calculate your LVR using the registered valuation instead of using the cost to complete. This can add up to a stronger equity position for lending purposes, save you money on low equity margins/fees and put you in a stronger borrowing position.
Fixed price contracts
Lenders have different requirements for what must be included in a fixed price contract. This is influenced by the LVR for the lending.
Some lenders require everything to be included – down to the letter box – while others offer more flexibility. If you are buying with less than 20 deposit then there are also significant variations around requirements relating to provisional costs (PC Sums) between lenders. This is where you and the builder choose to fix parts of the contract, and provide provisional costings for elements of the works that are not yet defined in enough detail for tenderers to accurately price, which can vary the final cost when the job is completed. This can create challenges and it’s key to get a clear alignment between the builder and the lender before you start.
Lenders also have different provisions to accommodate cost overruns. Depending on the lender and the type of new build you are looking at, this could mean a very minor difference or in some cases require up to 15% contingency.
So on a $400,000 fixed price contract, you might be assessed on $460,000 by your bank, which could affect the amount you are able to borrow or your rate.
Managing the process
Finding the right loan is only part of the process. With some construction loans there are varying requirements along the way which are not always managed fully by your lender.
It is important to be aware that an approval for land and build is up to 90 days with most lenders, and needs to be maintained and updated accordingly if the time frame changes.
Often your lender will expect you to be on top of this however at Loan Market we manage this for our customers, along with ensuring you meet any other outstanding conditions, so you are not caught short when it’s time to draw down, and your build can get underway on time.
These are just some of the differences between the banks when it comes to construction loans. So while there are lots of benefits to building new, the process in relation to lending is more complex than buying an existing home. Don’t panic through! At Loan Market we work with you throughout the process – from application, to build, to completion and beyond.