We’ve recently seen a massive overhaul of bank lending and who banks can lend money to. Banks and other lenders are now required by law to rigorously assess whether you can afford to borrow or top-up your credit.
Many of the new lending restrictions do not, however, apply to ‘new-builds’. The reason being, that the Government wants to ensure potential buyers continue to support the increase in housing stock by purchasing new-builds off the plans or building themselves.
Currently, buyers only require a 10 percent deposit to purchase a new-build, compared to a 20 percent deposit for an existing property. New-builds are also exempt from the 10-year brightline tax and changes to interest deductibility rules.
What constitutes a new-build today can vary though, depending on what exemptions you’re looking at. However, for our purposes let’s imagine a brand-new house being built on an empty section to be used as a main home.
The Land
If you’re looking to build a home, the first thing you need is land to put it on. Make sure you understand, or have someone (preferably a lawyer), explain to you what restrictions may apply to that land. For example:
- Developers often register ‘land covenants’ on the land that restrict the size and height of the home, how the property can be landscaped, how many carpark spaces you must provide, and a plethora of other things that need to be considered when undertaking your build;
- Zoning as set out in the local council’s district plan will also determine whether council will grant a resource consent for the land and building consent for the build; and
- Existing services on the land, for example a stormwater pipe connecting your neighbour to the pipes along the road, may dictate where you can build your home on the land.
The Build Contract
In order to build your property, you’ll need to find a builder. If you’re in the trades industry yourself, you may have someone to guide you and do the heavy lifting for you, or you may even be confident managing the build project yourself. For regular folk though, a good place to start is by approaching a well-reputed building company like G J Gardner or Signature Homes.
Each building company will have its own processes but be aware, it’s not as simple as just rocking up and signing a fixed-price build contract that you can then take to the bank. You may need to get the land surveyed, have a building consent issued or scheme plans put together. It could in fact be six months of preparation before you even sign the building contract!
It’s a good idea to approach the bank a few months before you anticipate signing the build contract, ideally once you have a quote from the builder, so that you know how much money you’ll need to borrow.
The Lending
Because there are some additional complexities involved in building a property, the bank will slip a few conditions into its lending approval.
Here are a few common conditions to look out for:
- Progressive draw down: this means the bank will pay for the build in instalments, often upon specified events occurring. For example, 10 percent on laying the foundation, 20 percent when the roof is on, etc.
- Provisional cost limits: even a fixed-price build contract will have ‘provisional costs’. These are things the builder simply cannot provide a definite quote for, such as flooring, scaffold hire, and retaining. Usually, the bank will limit a build contract to a maximum of 10 percent of the total build cost being provisional.
- Valuations: banks often require progressive valuations throughout the build, with some banks even including a condition that you must obtain a valuation whenever they ask.
- Timeframes: the house forms a large part of the bank’s security. Expect to see a deadline in which the build must be complete, usually about 12 months after construction starts.
- Insurance: your builder will need a builder’s risk insurance policy in place with your banks interest noted as mortgagee.
The Takeaways
Communication is key. Make sure your builder and bank are on the same page, payment schedules in your lending and build contract should align, provisional cost sums are monitored, delays are allowed for, and the appropriate insurance is in place.
Be sure to get the right advice. Speak to your lawyer, accountant, and mortgage broker to ensure you are making effective, informed decisions throughout the entire new build process.
