Land and Construction Loan
A land and construction loan provides funding for building property in a way that means you have the lowest possible repayments during the construction phase.
Because new construction loans are exempt from RBNZ (Reserve Bank New Zealand) rules you may only need a 10% deposit (20% for investment properties), so building a new home is a good option if you have a good income but haven’t yet saved your 20% deposit.
There are a few different types of build contracts and the loans for these can vary slightly:
Fixed Price Contract
This is probably the most common type of contract. The land will be purchased separately with settlement and payment usually due once title is issued. If you are building within 12 months, you can borrow up to 90% of the total project value. You will start making repayments (usually interest only) on the land loan upon settlement of the land purchase.
The builder will provide you with a fixed price contract for a fully completed and ready to live in dwelling. The contract will need to have minimum PC sums (these are non fixed allowances, usually for kitchens, bathrooms, etc where costs can change depending on things like fittings). The fixed priced contract will need to include a schedule of draw-downs or progress payments. These are payments that you will make to the builder during stages of the build, an example of this might
As the build progresses your loan payments will increase as each progress payment is made.
This is usually when you purchase a home and land package from a builder or developer. Usually there will be a 10% deposit payable with the balance due upon completion and settlement of the build. The benefit for you is that there are no progress payments so you won’t start paying interest until the property has been completed and settlement takes place.
As with the Fixed Price Contract, turnkey contracts are exempt from RBNZ rules, so you may only
need a 10% deposit (20% for investment properties).
Partial Contract/Customer Managed
This type of loan is for those experienced in the construction industry and therefore knows how it all works. For example you might be a builder constructing your own home or managing the project yourself while paying sub-contractors labour only.
These types of loans are also commonly used for kitset or relocatable homes.
Lending for partial contract or customer managed contracts is limited to 65% - 70% LVR.
Normal Conditions on a Build Loan
There are usually some extra conditions with a build loan, these may include, but are not limited to:
- You will need to provide a valuer’s report on the costs to complete your property, or the value of your property ‘as is’ and when completed. Some banks may also request progress valuations during the build to confirm the value.
- You must show the bank that you have all approvals, resource and building consents you need to build the property.
- The bank will need evidence your builder has a Builder’s Risk Insurance policy in place, and that their interest as mortgagee is noted on the policy.
- Before the bank release the final 5% of the loan amount, they may need a copy of your Code Compliance Certificate and a valuer's completion certificate. You'll also need to arrange insurance over the property. You must insure the property for an amount sufficient to completely repair or replace the property in a total loss situation. The banks interest as mortgagee must also be noted on this insurance.
- If the build price in your contract increases for any reason, you’ll need to re-apply for a loan for any extra amounts, and normal lending criteria will apply.
If you would like more information about build loans then please contact us to discuss further.