Building in 2020? The team at RPS know just how important it is to find the right lender for you and your new home – and we are here to help.
Each lender has different construction policies in place, which can greatly impact your final mortgage and your ability to build the home you want. We have gathered information on how different banks construction policies vary, in order to make financing your build as hassle-free as possible by helping you to understand how these policies can impact you and your new home.
New build lending rules and deposit
Building a new home impacts the size of the deposit you need, as new builds are exempt from the Reserve Banks (RBNZ) Loan to Value (LVR) restrictions. This applies to land and build, buying off the plans and turn-key home purchases.
The internal lending policies that banks adhere to differ between them, impacting the size of your deposit needed for an investment property or your own new home.
Some banks only require a 5% deposit for new home builds, although others will require 20% or more. This depends on your circumstances and may vary depending on your purchase type (i.e. turn-key or land and build). When buying an existing home, most lenders will require a higher deposit starting at 10-20%, depending on the bank.
Valuations and fixed price contracts
It is important to understand how valuations and fixed-price contracts vary between banks in order to save money during your build.
All banks require a registered valuation of the “as completed value” prior to the start of the build, although some also require valuations during the build itself as well. Choosing a lender that doesn’t require ongoing valuations could save you money in the long run. Also note that some banks calculate your LVR using this registered valuation, whereas others base it off the cost to complete. This could put you in a stronger borrowing position, as you could save money on low equity margins and fees.
When building a new home, RPS recommends using a fixed price building contract (FPBC), predetermining the final cost in order to ensure that you stay within your budget. Some lenders require everything to be included in a fixed-price contract, whereas others provide more flexibility around it. This is why it is important to fix parts of the contract with the builder and discuss provisional costing for areas that are not yet defined in enough detail to accurately price – this can vary the final cost when the job is completed.
It’s key to get a clear alignment between the lender and builder before you start your build in order to avoid conflict between parties.
Affordability and repayments
Banks also have different provisions to accommodate cost overruns, which could mean a minor difference or in some cases up to 15% contingency required on your fixed price contract. This is something to consider as it could affect the borrowing amount allowed or your interest rate.
When building a new home, the repayment options will vary between different banks, along with your purchase type. This is essential when building a new home to understand the different options and how this will affect your mortgage.
For example, buying a turn-key home and land package means that you may be required to pay an initial deposit, with no further funds required until the house is complete. This means that you may not be required to pay interest on your loan until you settle, therefore assisting you in paying rent or a mortgage on your current home during the build.
Key tips to consider
For those of you building a new home in the near future, we recommend a few tips for you to consider when financing your home build:
- Use a lender that permits a low deposit and no repayments throughout the build, making it more stress-free.
- Ensure that there is a clear alignment between the lender and builder prior to starting your build; This will reduce conflict between parties.
- Find a lender that specializes in the construction finance process from start to finish, guiding you through the process every step of the way.
New Home Sales Consultant