Financing a build can be complicated – here are a few things you need to know.
Building a house on a piece of land is a good way to get a foot on the property ladder, but it also creates additional challenges, especially when applying for finance.
With a housing shortage existing in some of New Zealand’s big cities, many home buyers are choosing to buy vacant land on the city fringes with the intention of building their dream home.
However, while building a house on an empty section is a great way to achieve your property ownership dreams, it can be a little trickier to finance. Here are some tips to help you understand how it all works.
Understand the different loan types
There are two main types of property loan on new builds – construction and turn-key loans.
Construction loan – this is the more traditional way of funding your building project and involves applying for finance to fund the build, either before or after the land has been purchased.
Turn-key loan – this is when you buy a house and land package off a developer by paying the deposit up front, and then no more until after the construction company has completed the build.
Each building type has its pros and cons. For example, a turn-key property can be seen as a more stress free approach. However it’s important to realise that if the building project comes in under budget, you are still charged the price you agreed. This option also allows very little control over the building process.
Work out how you’ll manage your finances
Buying land and building through a construction loan can incur a number of additional costs that many buyers don’t account for – like the fact you may have to continue renting after taking out a mortgage.
Building a house can take several months, so many home builders find themselves paying the mortgage that funds the build, and renting at the same time – so it’s important to know you can afford all of the costs before you start.
If you’re taking out a construction loan it’s also important to understand how the lender will pay the builder during construction. It’s possible for the lender to pay the builder directly, which simplifies the payment process, but also takes away the control of managing any payments yourself.
Make sure you have cleared this up with your lender before you start and choose the option that works best for you.
Talk about insurance
One of the most important things to do when you own any asset is to protect it. However, who is responsible for insuring the building during the building process is sometimes overlooked.
Talk to the builder about whether they will insure the building while it’s being constructed, or if that responsibility will lie with you? Don’t be afraid to ask the builder for copies of their insurance for added piece of mind and if you need advice on how to insure your building project, talk to a Mike Pero Adviser.
Also if you want to save on costs by moving in early – make sure the insurance covers this as well.
Be careful as not being insured can create big issues that can be easily avoided.
KiwiSaver and HomeStart Grants
First home buyers that choose to build a house, or buy off the plan, can apply for a different Home Start Grant – worth up to twice as much as those that buy existing property.
Do your research online to see what type of grant you qualify for and how much you will get. There are lots of factors that may stop you getting a grant, like if you’ve owned a home before, or the type of land you are buying – so do your research or talk to an adviser.
Don’t let delays in receiving the land title slow you down
Sometimes it can take time for the land title to come through after you’ve made your initial purchase, which leaves some aspiring home owners in a bit of a holding pattern.
Don’t let this slow you down, in some cases you can still get pre-approval for the loan to fund the build, which means less time waiting and more time planning to achieve home ownership.
How a mortgage broker can help
Financing a house and land purchase is complex and the policies vary greatly from one bank to another. Finding the right lender for the client can not only save money, but saves in time and hassle.
A Mike Pero Adviser can support you through what can be a long process from the initial planning stage right through to the completion of your very first home. Plus they know the market well and can help guide you towards the finance solution that suits your circumstance.
You can find your nearest Mike Pero Mortgage broker here.