Construction Loans
Building your dream home
What do you do when you’ve looked at plenty of homes and still can’t find the one that’s right for you?
If you’re in this position, constructing your own home may be the solution for you. For most people how and where to start is always the first question asked and while building your own home may sound exciting, it can be stressful if things don’t go according to plan.
Before you get the architect to create your plans and give the green light to the builder to start digging the ground you need to find out how much it will cost you to build your home. This includes including purchasing the land. Then you need to determine how much your bank is willing to lend you to build your dream home.
What costs are involved in building a home?
-
- Architect’s fee Unless you choose a standard house plan supplied by a builder, chances are you will need to hire an architect to turn the concepts in your mind into a a floor plan for your future home.
- Purchase of land If you do not own the land or a home on a section big enough to sub-divide, you will need to purchase a block of land to build your home.
- Resource Consent Resource consent is a formal approval or consent by the local city council to you to build your dream home. This falls under The Resource Management Act 1991 and involves careful assessment to make sure your home isn’t going to have a detrimental effect on the surrounding houses, environment and natural resources.
- Building Consent Building consent is a formal approval or consent by the local city council of your dream home’s building plan under The Building Act 2004 to ensure that your dream home will comply with latest building practices, codes and standards.
- Electricity, gas, and water meter connectivity A home with no electricity, gas, or water is no good to live in. Electricity, gas and water supplies come with a fee to connect your dream home to these utilities.
- Construction costs Amongst all the costs involved to build a home, this is the biggest cost charged by a registered builder or construction company to build your dream home.
- Valuation costs As part of your home loan approval, the bank will put a condition that a registered valuer assesses the value of your house before the construction, at fixed stages of construction then again after construction is complete. This is to ensure that funds released by the bank do not exceed more than 90% of the value of the house at any stage.
- Legal costs You also need a lawyer to advise you on the clauses in the building contract which you are going to sign with your builder, or when you sign the legal documents prepared by the bank to approve your home loan.
What documents are required for approval of construction loan?
All banks have their own special requirements to approve a construction loan on top of the standard documents required to get home loan approval. Your bank will ask you to provide the following additional documents:
-
- House plans Building plan or house drawings developed by an architect formally approved by the local city council.
- Fixed Price Building Contract Building contract signed by you and the builder listing the exact cost of building the home as well as a list of work to be done by the builder and stages of payment.
- Building Consent approval Formal approval granted by the local city council to build your home.
- Resource Consent approval Formal approval of your home drawings/plans granted by the local city council.
- Registered valuation A valuation done by a registered valuer listing the likely value of your house upon completion of the construction based on house drawings/plans.
- Builder Risk Insurance Certificate of Insurance given by the insurance company to the builder listing that bank will get money in case the house gets damaged during construction due to any natural or unnatural disaster.
- Rental appraisal If you plan to rent the home, bank will require an appraisal by a real estate agency confirming the rent the home is likely going to fetch.
How much can I borrow on a construction loan?
No matter the size of your dream home, most lenders are willing to lend up to 80% of the value of your home upon completion. Some banks will approve lending up to 90% of the value of the home if you will be living in the home and you sign a contract with your builder which lists the exact (not subject to change) land and construction costs for your home.
Building a home can end up costing more than what was originally anticipated. The costs may fluctuate due to delays caused by the weather, unavailability of labour and building materials, council requirements, changes to your home plans/drawings or a number of other unforeseeable circumstances.
Because of this, all banks factor-in that as part of your home loan application you can afford an additional 15% over and above the original construction cost listed in your building contract.