If you are on the path to buying your own place, or thinking about an investment property, you may be considering building rather than buying an existing home.
When looking at building a home, you ’ll have come across ‘turnkey’, and ‘fixed price house and land package’ and you may well be wondering what the difference is.
Getting the right loan when building a new home can make all the difference. If you’re unsure which loan option – house and land or turnkey finance – is right for you, we will happily walk you through the details. Call the team on 09 255 5500.
Buying off the plans
One of the advantages of building this way is that both first home buyers and investors can buy a brand-new house and land package with a lower deposit than for a pre-existing house at the same price. Current LVR restrictions don’t apply to new homes. First home buyers can purchase with a 10% deposit and investors can purchase with a 20% deposit.
Another huge advantage of purchasing off the plans is simplicity. Instead of buying a section, then working with builders, designers, and the council, you normally only work with the developer. Having both the land and construction all under the one roof can also see savings on build costs.
Building packages differ
First and foremost, it is important to remember that not all house and land packages are created equal. Be sure to do your due diligence.
You absolutely must take the time to carefully read through the contract and research the different types of builds, as they may vary in terms of what’s included, or not included, and who is responsible for unforeseen circumstances like timber shortages, storms or lockdowns and what impact it will have on final price. Developers often have clauses in the contract about price fluctuations.
Our mortgage brokers can make the process clearer. Very rarely will you be comparing apples with apples when it comes to building packages. It is very important to establish what you’re buying into. By using our expertise, and seeking legal advice, you won’t end up being hit with the unexpected.
Home and Land VS Turnkey
• A home and land package is a section and home package bought from a developer in two steps: buying the land then building the house. The loans can be arranged separately, but they are usually bundled together. Payments are made in stages as construction progresses. Your mortgage increases and interest payment grow as your new home takes shape. If you are a first home buyer renting this might not be suitable as you will be paying rent and also a mortgage at the same time until the house is complete.
• A Turnkey home is move-in ready, and you pay a deposit of 10% before the build starts, then no further payments are required until the build is completed. With a turnkey package, the price includes the cost of the land and the new home. The loan is still made up of two components, but they are released together as the price is fixed and construction is managed by the developer rather than you, the buyer. In general, banks tend to prefer this over a loan where regular instalments are made at key stages during the build, as the risk is completely with the builder until the house is complete. This is cheaper as you only pay rent until the house is complete and then switch to mortgage payment once you move into the new house.
Home and land – let’s unpack it
All going well, home and land packages can be the cheaper building option. Rather than managing the whole build, you buy a section, plans and the fixed price contract for building the house from a developer.
The finance side of a house and land package works slightly differently to a standard mortgage. When you’re building a home yourself, financing usually consists of a regular home loan for purchasing the land and then a second, independent construction loan for building the house whereby tranches are drawn down from the bank at different stages of the build based on valuations and quotes.
Land and build construction contracts are a fixed price for the entire project. Only minimal price changes or overruns are allowed. The loans are bundled together as one: you don’t need to get a mortgage for a section and then renegotiate a second loan when you’re ready to build. During the build, you do still make progress payments, so your mortgage increases as the work progresses.
Because you’ll have signed off on the house design as part of the deal, you’ll have a realistic idea how much you need to borrow, which lenders prefer.
A turnkey package
For you, the process involved in a turnkey build is a lot less complicated as the builder completes most of the steps required to build the property, such as consents, permits, signoffs etc. and carries the risk.
Unlike a standard house and land package, there are no progress payments required from you during the course of the build. All the costs of the build are paid by the builder as the build is happening. You won’t pay the balance of your fixed-price contract until construction is complete. Your mortgage payments will start after you move in, so you don’t pay any interest on your loan until you settle: a big advantage if you already have a mortgage or rent to pay.
Unlike many house and land builds, with a turnkey package there are no extra charges due to the build being underquoted or going over schedule. The builder or developer carries the risk for these, unless stated elsewhere. Check the fine print.
Reading the fine print – know what you are buying
Before choosing any type of building package, it’s incredibly important to check what is and isn’t covered in the contract before signing on any dotted lines. Are there steps to delivery? What are the timeframes? Is there anything not included? If you’re feeling overwhelmed by this, our expert team can help. Just make sure you to come to us before you sign anything.
What is in and what isn’t
While you’d expect things like blinds, paint and floor coverings to be in your new home, some elements that you may have assumed would be included, such as landscaping, paving, fencing and driveways may not be. Be sure to discuss everything carefully with your property developer. Do your due diligence. Let a lawyer review the contract given by the builder.
The devil in the detail
Check for those clauses in the fine print of your fixed build contract. Who is responsible for unforeseen circumstances such as global pandemics or climate change? Who pays?
No matter how meticulously you plan, unforeseen delays caused by weather, council requirements or the unavailability of labour and building materials will come at a cost, but to who: you or the developer?
How long is your bank loan for your house and building package valid for? Will the bank still honour your loan conditions if the build takes 12 months longer than expected? Ask your bank. If you’re not sure, we know what to look for and what questions to ask. We deal with banks, lenders and building packages on a daily basis and we can help.
Never rush into a building contract. It’s imperative you know right from the start what to expect. Make sure the contract and agreement are thoroughly looked over before committing. There are mortgage specialists at Global Finance who manage the lending process for house and land packages, so seek our help and also get legal advice.
Moving in or renting
In March this year, the government announced tax deductions on interest on rental properties would be removed. Buy a design and build package for a new purpose-built rental, however, and you will get a two-decade exemption. As a landlord of a newly built rental home, you will still be able to deduct the interest costs of the mortgage on your investment property from your tax bill. Want to know more about building packaged and investments? Talk to our team.
Building packages and finances
At Global Finance, we can take you through the whole building and loan process from start to finish, whichever option you wish to take. Get in touch with our team of mortgage brokers and make the most of our expertise and advice.
**These are general guidelines and are by no means a reflection of bank or lending policies