Just like buying an existing home, you will probably need a mortgage to fund the project, but unlike getting a mortgage on an existing property, there are some special considerations when you’re starting from scratch.
While banks are more than happy to lend you money to build, they do need to consider the higher financial risk involved. Normally, when a borrower can’t meet their loan repayments, the bank can sell the existing property to recoup their money. But that’s not as easy with a half-built house. So, mortgages for building projects have a few key differences – and they also differ depending on the kind of build you’re undertaking.
When you’re building traditionally, you start off with an empty section, then get the house designed and engage the services of a builder. Normally, the total amount of your mortgage is based on the estimated value of the finished house, but because the house is not complete, the funds will be advanced in stages. The amount of money released at each stage (known as a progress payment) is based on the value of the home at the time and the building costs outlined in the builder’s fixed-price building contract. The final payment is made once the Code of Compliance is issued and the house is ready to live in.
Throughout the build, you will need to provide documents like a registered valuation, council consents and permits (as they are obtained) and evidence that your builder is correctly insured. You need to start paying the mortgage right from the start of the build, but because you are only paying against the money advanced to date, your payments will start off small.
If you’re buying a house and land package from a developer, the process is much simpler. Generally, you just need to pay an initial deposit, and then the developer carries the cost of the build until the house is ready to occupy, at which point the Code of Compliance is issued, and your mortgage repayments begin. The only document you need to obtain is a registered valuation, as the construction company normally looks after everything else.
When building a new house, it is often easier to secure mortgage finance with small deposit (5%-10% of the house’s value), especially in areas with housing shortages, because you are increasing the housing stock.
Regardless of which kind of building project you are considering, we can help you navigate the finance process and obtain the best deal. Give us a call today to find out more.