New home buyers take on greater risk with trend to new builds
September 04, 2015 at 11:42 AM
Mortgage Brokers New Zealand - SEPTEMBER: More and more first home buyers are choosing to build their homes because they are exempt from the Reserve Bank of New Zealand’s LVR restrictions, and also because those who are eligible qualify for double the amount under the Government funded Welcome Home Loan scheme, than they would if they were buying an established property.
However, the trend towards new builds, certainly in the Auckland area, has seen the banks tighten up on new build mortgages because there are a couple of ways to do it and some are riskier than others.
Options include buying a house and land package through a building company that is Master Builder certified. It is a safer strategy, but it is also often the more expensive of the new home building options.
Some house and land packages may require that you pay a deposit upfront, with the balance – at an agreed value – paid upon completion of the work. Others may want payments throughout the build programme.
The other way is for first time homebuyers to buy the land first and, after settlement, build their new house. The difficulty there is that the bank makes progressive payments during the construction project and measures those payments against the value of the property based on certain milestones.
People who see a special on tiles or white-ware and rush out to buy those items before time, may find themselves stockpiling useless tiles and the bank refusing to make any more payments because all the money was spent before the nominated milestone is achieved.
If it is not part of the building, for example bathroom tiles stockpiled on site, it is not counted in the bank’s valuation.
Banks also appear to be taking a dim view of instances where owners want to do part of the work themselves, such as the earthworks.
Financial considerations when building your new home include making sure you can pay your rent as well as your interest payments to the bank, if you’re paying progressively, for the new build.
It is very important that buyers make sure they go with reputable builders who are backed by guarantees. Most banks will want to see a fixed price contract from a reputable builder — who you choose to build your home will affect your funding and the level of debt the bank is prepared to provide.
Look very closely at the building contract to make sure it does not require upfront payments and ensure your contract includes costs to complete the contract to code of compliance standards – that’s all the banks want, to know that you can afford to complete the new build to code of compliance standard.