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The Hidden Costs and Considerations of New Home Construction
•Zebunisso Alimova
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Dreaming of building your perfect home? Before you break ground, you need to understand how banks approach new builds differently from established properties. This eye-opening episode reveals the hidden financial complexities that can make or break your construction journey.
We explore the three main building pathways - turnkey packages, progressive payments, and labour-only builds - each with dramatically different financial implications. Did you know banks can offer 12-month pre-approvals for turnkey builds? Sounds great until you learn about the valuation risks that could leave you scrambling for extra funds at completion if the market shifts downward.
The financial juggling act of building becomes clear as we explain how banks assess not just your ability to repay, but also factor in potential cost overruns. For progressive payment builds, you'll face the double burden of rent plus mortgage repayments during construction. And if you're considering managing your own build, prepare for much stricter lending criteria - typically just 70% LVR compared to the 90-95% available for other construction types.
Perhaps most surprising is our revelation about developer "gifts" - those tempting furniture vouchers or upgrade packages can actually reduce your property's valuation in the bank's eyes, potentially creating financing headaches. However, there's good news too - new builds are exempt from the Reserve Bank's loan-to-value restrictions, potentially allowing more flexible deposit requirements.
Whether you're weighing up building options or already committed to construction, this episode provides crucial information that could save you thousands and prevent major financial stress. Don't start your building journey without listening first!
Hello and welcome back to that Home Loan Hub . I'm joined by Conch hey , conch Kia . Ora , let's build , let's build , let's build Housing under construction . Today we're going to talk about builds and if you're looking to build , what you need to be aware of and our point of view , yep , sounds cool , cool . So we've got a couple of clients at the moment that are keen to build because they want to have new housing . You know they want to have the latest insulation and also you know all the bells and whistles that come with the new build .
Speaker 1
So what do they need to be aware of ?
Speaker 2
As a home lending side of things , yeah , so when you're building
things , yeah , so when you're building , how the bank assesses it . They assess , obviously , if you can afford the loan , but also they assess the cost overruns as well . So the cost overruns is what we call a contingency plan . So some builds may go over the fixed price that you've actually signed up for . So , in terms of the assessment process , we just have to work out the extra 10% at some , or 5% at others as well .
Speaker 1
Yeah , and there are different types of builds , right . There are builds that come with , for instance , turnkey package , where you pay 5% at the front and then the rest at the end . And this one is an interesting one . A lot of clients don't realize , but we can actually obtain them 12 months approval Correct . So if they get certain things ticked off upfront , we can give them that peace
of mind for 12 months . So if the bill is not going to be completed within three months or six months , they don't have to keep coming back to us for reapprovals .
Speaker 1
You can give them 12 months and hopefully within that 12 months they get a build . But , however , if it's not built within that 12 months , a whole new application will be , required . So something again that people don't realize , and often in that 12 months a lot can change . They can go have a baby or two . Some people are incredibly talented .
Speaker 2
Well , twins are involved in that right , Unless you have Irish twins in that 12-month period .
Speaker 1
Exactly , you know a lot can happen , so you've got to watch out for things like that Cool . So one turnkey , turnkeys , yeah , 5% , deposit up front , 95% at the end , yes , then there is .
Speaker 2
So in terms of turnkeys as well , we'll just circle back to that . So you need to get a registered valuation at the start and at the end as well . In terms of turnkey . If the market changes , the market goes down . With turnkeys you may . If the registered valuation comes back lower than what your purchase price is in 12 months' time , you do need to find the funds to make the difference .
Speaker 1
Otherwise , Otherwise the birds are chirping . I don't want to say it yeah otherwise the bank may not be happy , you may not get the approval . So what you need to do in that 12 months time , during that 12 months
, you need to keep saving . You can't relax . Yeah , baby , until that house is built , yeah .
Speaker 2
Yeah , so in my time I have witnessed Clients buying at the peak . So was it 2022 , 23, . Property is completed , 24 . However , it's come to you know $60,000 less than what that purchase price for . Fortunately , you know most of the scenarios that I have seen . They've been able to make that difference up in terms of family members coming in to help in that sense . But hopefully that does not happen again , because you know the house prices back then was an anomaly as well . So people did overpay , overcapitalize in that 2021 , 2022 period . So yeah , that's just another thing to be mindful when you are purchasing turnkey properties .
Speaker 1
But the pros are . I guess when you're renting , you don't want to be paying for the build . Which brings me to my next point . Where's the progressive type repayment ? So you signed a fixed price contract and there are progressive payments . So every time something happens you make a payment . So foundation down , you make a payment , the roof is up , you make a payment , etc . So the cost of that adds up because you'll have to pay your rent plus mortgage at the same time .
Speaker 2
Yeah , so that kind of loan is called a housing under construction , which is basically a house and land package . So you pay for the land first and then your second chance of the loan is the construction part , where you progressively draw down on that loan . So the builder will invoice you , we send the invoice to the bank . They'll pay down the invoice amount to the builder .
because at the moment not many developers want to take the risk for the turnkeys . Usually they do the housing and the construction . And then the third option is usually labor only . So if you are a builder yourself and you want to build your own home , because you've scored a really good deal on the land section , because you're working so closely with the developer , et cetera , that's also an option .
Speaker 2
However , there's a few hooks on that one on the labour only side . So at the moment you can borrow up to 90% on housing under construction and turnkeys sometimes 95 . However , labour only is a little bit more restrictive in terms of loan to value , restrictive in terms of loan to value . So at the moment I've only seen 70% LVR in terms of labour only .
Speaker 1
But that's because when you're managing your own projects , there are a little bit more risk involved in terms of the cost overruns and things like that as well , and also remember , guys , if you're building your own home , it means you've been taken away from your actual work , so you can't be building your house and doing someone else's work at the same time . So this is where the bank will be looking at you more closely , going well , how are you going to make your money while you're building your own home ? So this is where having a buffer is very important . So normally you wouldn't do that as your first project . No , normally you would already have a couple of rental properties that are bringing you investment income . You'll probably have a partner that's working full time .
Speaker 1
So , whether you're the female builder or you're the male builder , you know the other person would be working full time and you probably have very , very good budgeting skills .
Speaker 2
Yep , yep . Budgeting skills Yep , yep . So you need to provide a very in-depth like spreadsheet of what your costings are going to be to satisfy the lenders . In terms of that , you have to evidence your experience in that industry as well , like what have you done in the past sort of thing are you an actual licensed builder or is there a builder coming through ? However , with the changes in building consent and things like that , things are probably going to get passed off quickly as well in terms of , you know , council signing off work and things like that . So it is a space that to look out for .
Speaker 1
Yeah , no , that's awesome , conch , did we cover everything ?
Speaker 2
Oh , there's just so , conch , did we cover everything ? Oh , there's just so much when you think about turnkeys and housing and the constructions in terms of build . But I guess , in summary , it's exempt from RBNZ , so the Reserve Bank actually exempts that . So there's no loan to value LVR restrictions on that . So you don't need a massive deposit in terms of purchasing a turnkey and you can get approval quite smoothly on that sense Registered valuation . So we must get a registered valuation at the start and at finish , sometimes during the progress of work as well , in terms of that side of things .
Speaker 1
Yeah , exactly no . Thank you so much . And while you were talking , I just remembered another very crucial point when it comes to turnkeys . If you're buying a property and the developer
is throwing in a lovely gift for you let's say a furniture package of $10,000 , you know . So you signed a deal . Today , you get a voucher . Be careful , because if that's built in into your sales and purchase agreement , certain banks have a policy to take away that $10,000 as the value of your house . So let's say you're signing a contract for $750 and you've got a voucher for $10,000 now . And you've got a voucher for $10,000 now and you've got , you know , 10% deposit only . Whatever , the bank will not see the house value at $750 . They will see your house value at $740 . So that 10K voucher that you're getting is actually going to hinder your application than help you .
Speaker 2
Well you think about it , a voucher is essentially a gift of cash or something , right ? It's not actually the value of your house , yeah .
Speaker 1
But apparently some banks are very , very , very strict on that . So just watch out and check with us before you make any major decisions . So , thank you so much . Stay tuned and check out any of our other previous episodes that might be relevant to you , and don't forget to share , subscribe and like us .
