Building your home, instead of buying an existing one, is an exciting opportunity, but one that can require a slightly different financial approach. The deposit, progress and completion payments, interest, valuations, and fixed price contracts all need to be considered when building new.
Building A New House – What you Need To Know
The good news is financing a new build is not as confusing as you might think, and in fact your bank and building company will take care of most of the details for you! Need a rundown of what’s involved in financing a new build? Take a look below.
Fixed Price Contracts
When financing a new build setting a Fixed Price Contract is the easiest way to give the bank the information they need and also to keep a control on the budget.
Both the home owner and the builder agree on the fixed price before any work commences. There may be an allowance for “adjustments” as the need arises, these can be a result of changes made by the home owner or just unforeseen circumstances.
The Deposit On A New Build
Just like when buying an existing home, the bank is going to require some sort of deposit. The good news is this is likely to be less than the standard deposit which is currently around 20% of the purchase price.
In New Zealand, for new builds, many banks will accept a 10% deposit which can sometimes be funded by your KiwiSaver contributions – more on this later.
Progress Payment Schedules
All good building companies will provide you with a detailed payment schedule outlining the payments expected at each stage of completion. Specific invoices will then be produced at the appropriate times detailing the payments required at that time.
Progress payment schedules are important not only for the homeowner but also for the bank funding the build, as payments are made directly to the builder.
The Completion Payment
On completion of the new build the Progress Payment Schedule will outline the final amount to be paid to the building company. This amount may have altered during the process of the build particularly if you have requested any changes or if there had been any unforeseen circumstances arising.
The completion payment is usually dependent on the local council issuing the Code of Compliance Certificate.
In New Zealand any new build requires Building Consent issued by the local Council before any building work can take place. The building consent outlines the type of structure to be built, what it is made from, the specifications and other information required by law.
Usually your builder will apply for the Building Consent as part of their services to you, this is usually the best way to go about the process as builders know what the Council needs and expects from the documentation.
Code Of Compliance
The Code of Compliance is issued under Section 95 of the Building Act 2004 confirming that the Council is satisfied the building work complies with what was presented when applying for the Building Consent.
Without the Code of Compliance the bank will not make the final completion payment and insurance is likely to become complicated. Your builder will apply for the Code of Compliance when they believe the building is compliant, the fees for this should be included in your Fixed Price Contract.
When funding your new build most banks will offer you what is called a ‘Construction Loan’. The main difference between Construction Loans and a regular mortgage is the full amount isn’t paid out at once, it is paid in installments based on the Progress Payment Schedule.
Each bank will have slightly different incentives or conditions associated with their construction loans so it does pay to shop around. A standard construction loan will include pre-approval of the amount of funds available, the choice of interest only payments during the construction period and the need for a professional valuation of the property based on the plans.
As with any loan, interest payments are going to be a factor. In the process of building a new house it is only necessary to pay interest on the loan as it is drawn down.
This means during the build you will only be paying for partial loan amounts until the final completion payment has been made. This can help alleviate the cross over between renting and moving in to your new home.
3 Ways To Help Finance Your New Home
The pressure of finding the money to build a new house is no different than when buying an existing house, read on for our tips on getting your funding together.
1. The NZ KiwiSaver Scheme
Both programs require you to have been a member of KiwiSaver for at least three years. Upon meeting the necessary requirements you may be able to withdraw all, or part, of your KiwiSaver savings to put towards funding your new home. See the KiwiSaver website for more information on accessing your KiwiSaver funds to build a new house.
2. Save, Save, Save! – Top 5 Tips For Saving For A New House
Your house is likely to be the most expensive thing you ever put your money towards. For most us, that means assessing your lifestyle and seeing where you can make some adjustments. Here are our top 5 tips for saving for a new house.
- Ditch The Luxuries. Unnecessary spending such as eating out, holidays, new clothes and homewares may need to take a backseat, depending on your financial situation. Although some of these may seem like small expenses, it’s the small things that add up.
- Cut Back On The Takeaways. If you’re buying takeaways several times a week, try putting aside some time at the weekends to cook up extra meals to have in the freezer. That way you avoid any irrational food purchases based on an empty stomach and fridge.
- Stay Close To Home. We kiwis love to travel, and overseas trips are one of the first things to go when saving for a house. But luckily, we live in a pretty special spot, so prioritise going on low-cost trips such as camping weekends or staying in budget accommodation with cooking facilities. You still get a refreshing time away, without the expense of a big holiday.
- Maximise The KiwiSaver Contributions. Another great way to save for your house is to maximise the amount you are putting into your KiwiSaver account. That way, the money is automatically deducted from your pay check, so there is no temptation to spend it. This will also up the contribution from your employer as well as any government incentives.
- Shop Smart. Keep an eye out for specials and deals, particularly on things like groceries and clothing. Even do an audit of your insurance costs, bank fees and other fees charged to see if you can reduce these by combining them into one company etc.
3. Getting A Mortgage – Banks Vs Brokers
Once you’ve got your deposit ready to go, the next step is choosing your lender. Home loans are available from banks as well as other lenders such as credit unions, private finance companies and building societies.
Most people go with a bank, but it pays to remember you are under no obligation to go with your usual bank. Others may offer incentives and deals, especially if you are willing to take out a mortgage and switch your accounts over.
Most banks will offer lending in the form of a Construction Loan using a floating interest rate. Each bank will have slightly different conditions and perks that go with choosing to bank with them but most Construction loans will include some or all of the following:
- 12 months to draw down your loan/loan pre-approval
- Progress payments added to loan as required
- Lending specialists to advise you on the best option
- No interest payments during the build
- Low deposit thresholds
- Reduced or no account fees during the build period and after
- Repayment holidays as negotiated
- The need for a Master Builders Guarantee or a Certified Builders Guarantee
To help with the home loan process, you can also go through a broker. Mortgage brokers are up to speed with all the offers from different banks, so their knowledge can be invaluable. They can also negotiate deals on your behalf.
However, brokers will get different commission rates from different banks, so they may try and sway you towards one particular lender over others. This is something to be cautious of, as well as knowing that some lenders may not work with mortgage brokers at all.
If you do sign a deal through a broker, there shouldn’t be any additional fees; however, make sure you know what you’re committing to. If a mortgage broker negotiates a deal on your behalf, that you then decide not to go ahead with, there may be extra fees involved.
If you think going through a mortgage broker is for you, meet with a few different brokers until you find one that you are confident will get you the best deal. Personal recommendations from friends and family are always a good sign.
Repaying Your Home Loan
Once you’re on your way to signing your mortgage deal, there are a few things to bear in mind that could save you a lot of money over your term.
The amount of interest you must pay, on top of your loan repayments, is based on how much you owe your lender. Therefore, the more you repay in the first few years of a mortgage, the lower your interest repayments will be. Mortgage terms are often over 20 to 30 years. This means even an extra few dollars each week, could save you a huge amount in the long run.
Make your repayments as high as you can, and if you come into some additional money, make a lump-sum repayment. But it’s important to also be realistic. Missed mortgage repayments can result in late fees, or in the worst-case scenario, a Letter of Demand.
Talk To Us
Building a home is a massive financial decision, and one that shouldn’t be taken lightly; however, the reward of owning your dream home is like no other. Get in touch with professional builders Build7 today and we can chat about tailoring your home build to your budget and needs.