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Advanced Mortgage Solutions have been arranging construction loans since 2006.
Recently the ways you can finance the building of your own home has changed.
Not only has the deposit required to build your own home changed (now exempt from the 20% Reserve Banks rules), but the ways in which you can have a house built now has more than one option.
Let’s go over the older more traditional method of building a home and then compare it against the new and possibly more convenient way of having a house built.
The fixed price contract method of building follows a more traditional way of having your house built.
Using this method, the purchaser would go out and have a look around sections for sale in an area they would like to build a house. Once the perfect section is found an application to purchase the section is made. This is where using a mortgage broker is a good idea as there are large differences in what each lender in New Zealand offer when it comes to their build policies. The deposit to purchase the section is usually 20% of the section’s purchase price.
Once the section is purchased its time to look around at who you would like to build your home. This involves going around the builders in your area and looking over their plans and deciding on what your dream home should look like, how much it will cost, and how long it will take to build.
From here a second application for finance to complete the build is done. Again it is a good idea to use a mortgage broker as banks policy vary hugely in what they offer and there is a big difference between the best and worst options.
Things the lender will require:
- A full statement of position (application form)
- A Sales and Purchase document
- A registered valuation of the project
- Full set of plans/specifications
- Building permit/consent
- Builders risk insurance
This method of building results in the purchaser making progress payments to the builder as the house is being completed. This happens in stages and is pre-arranged in the fixed price contract and cannot be changed. As each payment is made to the builder the purchaser starts to make mortgage repayments on the amounts being drawn down to complete the build.
Having a house built for you using the Turn-key method is the ‘newer’ and some would say more convenient way to build.
The major difference in the two methods of building a house is the customer’s involvement in the build process. With the fixed price contract method, it is up to the purchaser to find the section, hire a builder, and support progress payment throughout the build period.
A Turn-key purchase is a lot simpler than using the fixed price contract method and can remove a lot of the stress involved in a build. Finance can either be arranged through applying for pre-approval or can be completed once you have found the right house to build.
So how does it work?
With a Turn-key build the purchaser finds a subdivision they are interested in building their new home and approaches all of the builder’s show homes within the subdivision. After seeing what sections and house plans each builder has to offer, it’s time to make a choice on which builder they would like to run with.
The purchaser and the builder will now enter into a contract to buy the land and build the house.
Things the builder will require.
- A signed Sales and Purchase document
- Evidence that finance to purchase the property has been completed
- A 10% deposit as a sign of good will
It is at this point that the biggest differences are seen between the fixed price contract and the Turn-key build.
Unlike the fixed price contract there are no drawdown payments required by the builder, consents and permits are not required by the lender, and the purchaser is removed from any disagreements between what the lender expects to be built at every drawdown stage and what the builder has completed.
In fact, apart from the initial 10% deposit paid to the builder as a sign of good will, the purchaser does not have to spend another cent until the house is completed, Code of Compliance from council has been issue and the settlement day has arrived. This removes any mortgage payments being made during the build process (which is handy if you are renting while the build is being completed), and only start once you have settled on the house.
When you employ a builder to work for you on a labour-only contract you manage the whole process and the builder is only responsible for the building of your property. People often take this option in the belief that they will have better control over the building process or because they want to save money. Many times a labour only contract is used because the vendor has contacts within the building industry and believes they can knit together a build using these contacts, resulting in a cheaper build. With this type of contract, you either pay your builder by the hour, by the week, or a set price set out before the build starts. Many like paying a set price as it incentivises the builder to work steadily to finish the job in a reasonable timeframe as the job would have been priced on a set number of hours, which can be effected by outside influences such as weather or the availability of materials.
The drawbacks of the labour-only contract include:
For everyone’s protection, make sure the duties of each party are very clearly spelt out in the building contract, allowing each person to know what they are doing and their responsibilities while onsite.
Another option to a labour only contract is the managed labour-only contract. This type of contract is part way between a full fixed price contract and a labour only contract. Under this arrangement the builder manages the day-to-day building of the property and you are responsible for pricing the job, receiving quotes and organising the materials and subcontractors to complete different parts of the build. However, the builder may do some of this work depending on what you’ve agreed in the contract. People looking to build usually choose this option to save money by doing some of the work themselves, but it can be a huge time commitment and does usually require some previous experience in project management.
You won’t always save by purchasing the materials yourself, this is because even though builders add a mark-up to the materials they supply, they buy these materials at trade prices so they will often still be cheaper than what you can buy over the counter. However, if you are buying a house load of materials you could negotiate a substantial discount with the supplier or suppliers.
Warning - If you buy the materials yourself, any problems with quality or quantities will be your responsibility to sort out. This of course is the builder’s problem when completing a build through either a Fixed Price Contract or Turn-Key build.
If you choose a Managed Labour Only Contract, you need to be satisfied that the communication between you and the builder and lines of responsibility are very clearly defined within the contract.
Making it clear on what kind of contract you want
It is absolutely crucial that you and your builder are very aware on what sort of contract you want, this is particularly important with builds because there is such a huge difference in the expectations from one type of contract to another.
Most builders will fit in with the type of service you ask for but you’ll probably find that most have a preference. I.e. some builders may prefer not to work under anything but a full fixed price contract or turn-key so they can keep control over the project.
Just make sure you are sure and happy before you sign anything.
There is no right or wrong way to complete your build. There are however options available to you to complete the construction process. For people who are busy and have not built before then maybe the Turn-key option is better suited, however if you are experienced and don’t mind the challenges of completing a fixed price contact build then the option is available.
At Advanced Mortgage Solutions we pride ourselves on taking our clients through the whole process from start to finish and will happily help you through which ever option you wish to take.
Please contact us here to find more on building the perfect property.