Financing a house and land package

What’s involved: who pays what and when

Many people dream of building their own home, but it can involve a lot of hard work. There’s finding the land, drawing up the plans and managing the build. Coupled with the uncertainty of unforeseen issues and sometimes budget blowouts, a brand-new build isn’t always the best option for some home buyers.

But when one door closes, another opens – and through it comes a house and land package. There are some perks to living in a new home – low maintenance costs, no major repair bills in the foreseeable future – and a house-and-land package makes the process of investing in a new build simple, secure and speedy. Many property developers will offer standard or custom-build options, so you can have some say in your slice of land and the design aesthetics of your new home.

In the end, you get a house that has been made to fit your lifestyle, and come move-in day your home is ready. Buying a house-and-land package can also help you plan your finances with confidence. The finance side works slightly differently to your run-of-the-mill mortgage – and for first-home buyers, it can be especially enticing.

Here’s what you need to know about financing a house-and-land package:

Smaller deposit required

In New Zealand, most first-home buyers require a minimum 20% deposit, but because house-and-land package new builds are exempt from the Reserve Bank’s LVR (loan-to-value) restrictions, you can buy a brand-new home with a lower deposit (10%) than you would need for a pre-existing house at the same price.

Borrowing a construction loan

When building a home, financing the project usually consists of two steps – buying the land and then building the house. Buying land is a standard real estate transaction that requires a regular home loan. Building the house requires a construction loan – finance specifically used to fund the build of a new home. With house-and-land packages, these loans are bundled together.

With construction finance, the full amount of the loan isn’t paid all at once. Progress payments are made at different stages of the build, which means you won’t pay interest on the full amount until your home has been completed.

You won’t need to start paying your mortgage repayments either – not until the build is finished. This is good news for most borrowers – especially if you’re paying rent or another mortgage while you wait. All the while, the capital value of your property will start to increase from the day that builders walk on-site.

Building contracts

Your building contract must be a match for your loan documentation. It should list the exact land and construction costs for your home, so your lender can see how much money you need to borrow to finance the build. Fixed price house-and-land packages are good because they don’t generally involve any additional expenses (but it still pays to check what’s included). Sometimes, lenders will request amendments to contracts or stage the finance in a different way to what your builder may require.

Once you sign on the dotted line there’s no way out, so it pays to make sure all parties are on the same page.

Payment schedule

Your building contract will contain a schedule and method of payment based on various stages of the build, e.g. foundations and floor, framing and roof on. These payments are often based on a percentage of the contract price rather than the value of the work.

Your lender will need to agree to make advance payments when they’re required otherwise your builder can stop work on-site until payment is made. There may also be penalty interest if you do not pay on time.

When it’s time to pay

Generally, you’ll have seven days to make your scheduled payments. Some lenders may require you to pay the initial invoice and will only start releasing funds from the construction loan once you’ve used all your deposit.

Make sure your builder sends you any payment requests well ahead of their due date – that way, if you run into any issues with your lender, you have time to get things sorted.

Advantages of KiwiSaver

If it is your first home, you may be eligible to withdraw funds from your KiwiSaver account to go towards payment of your house-and-land package. You might also be able to access a KiwiSaver HomeStart grant which could give you up to $20,000 more towards your new build (property value and income rules apply).

Make sure you factor into your payment plan how long it will take to withdraw money from your KiwiSaver account and apply for a HomeStart grant.

Be prepared for any delays

No matter how meticulously you plan these things, unforeseen delays caused by weather, council requirements or unavailability of labour and building materials will come at a cost. The best thing to do to keep your finances in check is to leave a small buffer in your budget to cover any unexpected costs.

It’s the final countdown

After months of hard work by your building team, your brand-new home is ready to be lived in. It’s at this stage that you’ll need to make the final payment. Often this is required upon practical completion – in other words, when building work is finished except for minor touch-ups. Again, be sure to check that your building contract clearly states when your lender and your builder expect final payment to be processed.

Turning a new house into a home

House-and-land packages are a great option for the right home buyer. For first-home buyers and property investors alike, they’re a simple and stress-free way to buy a new, modern home that you can count on to be warm and dry for years to come. When it comes to financing a house-and-land build, working with a mortgage broker who understands the intricacies of a construction loan and the build process will help ensure all things financial run according to plan.

Thinking of buying a house-and-land package? Speak to a Global Finance mortgage broker today.

**These are general guidelines and are by no means a reflection of bank or lending policies