Turn-key or Construction Loan – Which is Best?
In recent years there has been changes to the way you can build a new home, rental property, or life style property. The traditional way of building is a thing of the past. No longer is there a need for a valuer to come out and evaluate the progress of your build at each draw down stage – the future is here and there’s two main options.
Construction loans are considered the more traditional way of building, and overall can be the cheapest method of building. However, there is a substantial amount of work to do to build a home using a construction loan.
Construction loans generally mean you go out and find the section you would like to build on, purchase the section and then look around at what different building companies are offering in the way of plans and building designs. Once you have settled on the style and plans of a house with a builder, you will more often than not need to arrange finance.
This is where Construction Loans are a little more challenging than the newer ‘Land and Build Packages’ (sometimes referred to as Turn-key Builds). When building via a construction loan the lenders will ask for extra information above and beyond a normal application of finance.
- A lender will require a Fixed Price Contract from the builder with a draw down schedule published within the contract. The draw down schedule provides evidence to the lender on how the build will be paid for through the build process.
- Consents and Permits from Council for the build will need to be provided to show what you intend on building has been approved by council. In most cases your builder will do this for you.
- Your builder will have to provide evidence that ‘Builder’s Risk Insurance’ is in place for the build. This provides protection against damage during the build process, so if something is damaged and has to be replaced you or the bank are not out of pocket because the ‘Builder’s Risk Insurance’ covers the cost of the damage.
- A Registered Valuation is required before the build starts. The lender wishes to understand the value of the build before it starts (the value of the land), typically known as the ‘as is’ value, and the ‘as completed’ value, which is the combined value of the land and the build once the build is finished.
Outside of the 4 points above the rest of an application for finance is unchanged from what is supplied as part of an application to purchase an existing or pre-loved house.
Once the build starts and the progress payments begin (mentioned in the draw down schedule). So does your obligation to pay the mortgage. At the start, the repayments will be small because the payments for the build have only just started. I.e. the first payment is usually required once the floor slab has been laid, then another when the walls are up and the roof is on, and so on until the build is completed.
The final payment is only released by the lender when the Code of Compliance from Council is issued and the house is ready for you to move in.
Land and Build Packages (Turn-key Builds):
Land and Build packages have become more popular recently and although are often a little more expensive than a construction loan, they have what some would argue are some significant advantages over a construction loan.
When building using a Land and Build Package the process is considerably different to building through a construction loan. Depending on the builder, there is normally a small deposit required up front before the build starts and then no further funds are required until the build ends.
The process is also a lot less complicated as the builder completes most of the steps required to build the property, unlike a construction loan. These include:
- As the build is completed by the builder and all the costs of the build are paid by the builder, there is no need to supply a Fixed Price Contract to the lender. The consent and permits are still required, but once again this is completed by the builder as is the need to provide Builder’s Risk Insurance.
Outside of the normal lending criteria to purchase any house when lending is required, the only condition required when building vis a Land and Build package is to have a registered valuation completed to illustrate the value of the house once the build is completed.
There are two distinct ways or building a new home. There is nothing wrong with either option, however there are some advantages and disadvantages to consider.
Advantages of a construction loan:
- Once you have chosen the section you would like to purchase, you can engage any builder you like to build your home
- Builds via a construction loans are usually a little less expensive than those purchased via a Land and Build package.
Disadvantages of a construction loan:
- There is more work to be completed by the applicants as part of the assessment process before finance can be confirmed.
- Mortgage repayments need to be made during the build process which can make life a little harder if rental payments also have to be met.
Advantages of a Land and Build (Turn-key) purchase:
- Only a small deposit is required to start the build
- There are no mortgage repayments during the build allowing less financial restraints if applicants are already paying rent etc.
- There are less conditions to be met by an applicant if entering into a Land and Build package
- Mortgage repayments only start after Code of Compliance is received and you have moved into the property.
Disadvantages of a Land and Build (Turn-key) purchase:
- The builder already has an interest in the land, so if a section is ‘liked’, then the applicants need to use the builder that has the interest in the land.
- They tend to cost a little more than a construction loan
There is more to each of the options above, so please feel free to contact us if you have any questions around building a home, be it for yourself, as a rental property, or lifestyle block.