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All loans are not created equal

Posted on Mar 22, 2013

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Maria-Thackwell

By Maria Thackwell

With the Christchurch rebuild firmly underway and insurance companies working hard to meet ambitious settlement quotas, the property market in Canterbury is booming. Choices regarding whether to purchase an existing property, or whether to build, are perplexing for many people who have accepted settlement for their
damaged homes.

Increasing property prices and high demand for limited stock on the market makes building tempting. However, there are different criteria when banks are lending for construction purposes and arranging finance for a new home is very different to arranging a mortgage on an existing property.

The best advice for anyone contemplating building is to seek professional advice early in the process. Find someone you trust and can openly communicate with to help navigate the process. As well as differences in terms and conditions of lending criteria for construction loans, costs can vary widely between banks.

Some banks require interim valuations at specified stages of building and there may also be fees from the lender for each progress loan drawdown. That can be costly. Other lending institutions require a single valuation up front and one at the end of the construction phase.

Purchasers need to be clear on what consents, permits and additional costs will be involved over and above the construction loan as in some cases, in order to go “unconditional” on your build contract, you need to pay for these up front.

Through the project there are times of the ‘chicken and egg’ scenario for the purchaser, who will inherit a certain degree of risk, such as when committing to building while their finance is still conditional on a clear title which may take quite some time to be issued.

Rather than spending time developing plans with the construction company or talking loans with the bank, visit a broker first to get insight into the full process, how much you can borrow and which provider best meets your specific needs. Construction companies will love you for it, as they have a clear budget to work with from the start.

Pre-approval for a construction loan comes with many, many conditions. Ability to repay the loan, credit worthiness, character and banking history will affect the bank’s willingness to loan. Even when the bank or lender agrees, the offer is ‘in principle’ and subject to terms and conditions that may be months away from confirmation.

There can easily be six months between when the purchaser makes an unconditional offer on a section and when the title is through. The bank finance will be provided unconditionally at the end of that period.

Options for achieving a new home vary and as a rule of thumb, compliance issues for loans will vary accordingly:

  • Design and build – custom designed homes require loans to suit individual projects
  • Purchase off plans –generally a two part loan
  • House and land package – a full turnkey solution and least complicated option is 10 percent on confirmation and 90 percent settlement when purchaser takes possession.

New builds generally require a larger deposit as banks tend to offer a maximum loan of 80 to 85 percent of the value of the home. Loan money is paid in stages during construction.

Changes to the building design can impact on the drawdown.

Every change must be advised to the bank. It helps to have someone who knows what they are doing to make the process go smoothly.

Insurance cover for new building projects can also be a thorny issue and professional advice is invaluable in securing an acceptable - and timely – policy.

In order to accommodate unexpected increases in costs, allow a 20 percent margin.

Underestimating the cost of the project is common, as is overcapitalising. Again, advice early in the project can save money and heartache.

We talk about long term goals. If a person is building a home for life, overcapitalising is not such an issue. But if they are planning to stay for just a few years, there is no point in building a dream home that may not recoup the cost of building in the shorter term.

When building you get exactly the home you want. Understanding the construction lending process is the key to ensuring the building project is a dream, not a nightmare.

Maria Thackwell created her own mortgage company to offer independent mortgage brokering services and financial advice to clients throughout the Canterbury region. Visit www.mariathackwell.co.nz

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