Building a home is likely the largest financial commitment you will ever make. While choosing the right floor plan is fun, the “unsexy” part—the contract and the financing structure—is what actually determines whether your project succeeds or ends in a legal stalemate.
A recent report by Stuff highlighted a major red flag for Kiwis: builders asking for deposits over 10%. From a mortgage advisory perspective, this is just the tip of the iceberg. Here is how to protect your equity and ensure your loan stays on track from the first shovel to the final sign-off.
- The 10% Deposit Red Flag
In the current market, some builders face cash-flow pressure and may try to use your deposit to finish their previous project.
- The Risk: Banks release funds in “progress payments” only after physical milestones (like a roof being on) are met. If you pay a 30% deposit and the builder goes bust before framing, the bank will not “top up” your loan to cover that lost cash.
- The Rule: Never pay more than 10% deposit upfront to start the build and query the builder how the initial deposit will be used. Ideally, you should only pay for work that is physically visible on your site or materials that have been delivered.
- Beware the “PC Sum” Trap
PC Sums (Provisional Cost Sums) are “estimates” for items not yet finalised, such as kitchens, flooring, or earthworks.
- The Pitfall: Builders may use low PC Sums to make a quote look cheaper. If the actual kitchen costs $15,000 more than the “allowance,” you have to pay that difference out of your own pocket.
- The Fix: Banks prefer Fixed-Price Contracts. Minimise PC Sums by choosing your finishes before signing. If you must have them, ensure your contingency budget is large enough to cover a 20% blowout on those specific items.
- Synchronizing Your Loan Drawdowns with Build Progress
A frequent cause of construction stress is the “funding gap.” This occurs when your builder’s invoice schedule doesn’t align with the bank’s strict drawdown rules.
- The Pitfall: Your builder may request payment for “materials on order” to secure supplies. However, banks generally only release funds once those materials are physically “affixed to the land.” If the builder asks for money before the bank is willing to release it, you could be forced to bridge the gap using your own life savings.
- The Fix: We review your build contract to ensure milestones (such as Foundation, Framing, Roof, and GIB) align perfectly with the bank’s valuation stages. Crucially, we check that the payment schedule is not “front-loaded.” * The Reality Check: The percentage of money paid to the builder should always reflect the actual percentage of work completed. For example, once the exterior cladding, doors, and windows are installed, a house is typically 50% complete. At this stage, your builder should have received roughly 50% of the total contract price—not 60% or 70%. Keeping these in balance ensures you never pay for work that hasn’t been done.
- The Licensed Building Practitioner (LBP) & Guarantees
Your loan approval isn’t just about your income; it’s about the safety of the bank’s security.
- The Pitfall: Using an unlicensed builder or skipping a third-party guarantee (like Master Build or Halo) can sometimes lead to a loan decline. These guarantees protect you if the builder goes into liquidation or structural defects appear years later.
- The Fix: Always verify your builder’s LBP status and ensure the cost of a 10-year guarantee is included in the contract price. Note that the Master Build Guarantee covers loss of deposit and non-completion, whereas some others only trigger after the build is finished.
- The “Code Compliance” (CCC) Finish Line
The project isn’t over when you get the keys; it’s over when the council issues the Code Compliance Certificate (CCC).
- The Pitfall: Until the bank receives the CCC, they may keep you on a higher “construction” interest rate or refuse to release the final 5% “retention” payment to the builder.
- The Fix: Never make the final payment to a builder until the CCC is in your hands. This keeps the financial incentive on them to finish the paperwork, not just the painting.
- Budgeting for the “Invisibles”: Avoiding the Funding Shortfall
Lenders typically require a 10% to 15% contingency fund as a condition of your loan. However, many homeowners make the mistake of thinking this buffer is for “extra” features. In reality, it is there to cover the “invisibles”—essential costs that a standard build contract often excludes but the bank requires for a liveable home.
- Council Fees & Development Contributions: These levies fund local infrastructure (roads, water, parks) and can range from $20,000 to over $50,000 depending on your region.
- The Pitfall: These fees are often required before the first loan drawdown is released. If you haven’t budgeted for these upfront, you may face a significant cash shortfall before the slab is even poured.
- Landscaping, Driveways, and Fencing: It is common for “Build Only” contracts to stop at the front door.
- The Fix: Ensure the build contract you submit to the bank explicitly includes landscaping, driveways, and fencing. If these are left as “owner-supplied,” the bank may exclude their value from the final appraisal, meaning you won’t have the funds to finish the section.
- Dual-Housing Costs (Rent & Interest): While your new home is being built, you will likely be paying rent or a mortgage on your current home plus interest on the construction loan drawdowns as they increase.
- The Strategy: We recommend including these “holding costs” and council fees in your initial loan application. By factoring these in upfront, you ensure you have a complete funding package that covers the project from the first consent fee to the final blade of grass.
Your Builder-Proofing Checklist
| Step | Action Item | Why it matters |
| 1 | Check the Deposit | Ensure it’s 10% or less to protect your cash. |
| 2 | Verify Builder’s Building Practioner Status | Mandatory for bank approval and insurance. |
| 3 | Limit PC Sums | Avoid “hidden” costs that blow your budget. |
| 4 | Review Milestones | Ensure the bank will pay when the builder asks. |
| 5 | Secure Guarantee | Master Build or Halo protects you if the builder fails. |
| 6 | Hold Retentions | Keep the final payment until you have the CCC. |
The Bottom Line
A construction loan is a three-way partnership between you, your builder, and your bank. As your mortgage advisors, we act as the “translator” to ensure everyone’s expectations are met. By avoiding these pitfalls, you turn a high-risk project into a smooth path to your new front door.
How Global Finance Helps
Navigating a construction loan is vastly different from a standard home loan. We at Global Finance work as the bridge between you, your builder, and the bank to ensure:
- Your payment schedule aligns with the bank’s criteria.
- Your contract protects your deposit.
- You have the right insurance (Contract Works Insurance) in place before work starts.
Before you sign that contract or pay a cent in deposits, talk to us. We’ll help you “builder-proof” your finances so you can focus on the design, not the debt.
*The information and articles published are true to the best of the Global Finance Services Ltd knowledge. Since the information provided in this blog is of general nature and is not intended to be personalized financial advice. We encourage you to seek Financial advice which is personalized depending on your needs, goals, and circumstances before making any financial decision. No person or persons who rely directly or indirectly upon information contained in this article may hold Global Financial Services Ltd or its employees liable.