Buyers take on greater risk with trend to new builds
Press Release: For Immediate release
LoanPlan Mortgages and Finance
3 September 2015
New home buyers take on greater risk with trend to new builds
The increasing number of first time home buyers choosing the new build route to home ownership – as a means of bypassing the Reserve Bank’s loan-to-value ratio (LVR) restrictions – may be exposing themselves to greater risks.
Auckland mortgage broker and principal of integrated financial services provider LoanPlan,Christine Lockie, said her company is seeing a sharp rise in first home buyers looking to fund new builds, but it’s a more complicated process and buyers are urged to do more due diligence.
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, not all build programs are exempted from the Reserve Bank restrictions
“The trend towards new builds, certainly in the Auckland area, has seen the banks setting more rigid conditions on new build mortgages. There are several ways to build a home and some are riskier than others,” she said.
Options include buying a house and land package through a building company. It is a safer strategy provided it is with a reputable building company, but it is also often the more expensive of the new home building options.
“Some house and land packages may require you to 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,” she said.
Alternatively a homebuyer may buy the land first and, after settlement, prepare to build their new house. The difficulty here is that the bank makes progressive payments during the construction project but 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 using the funding approved for the build programme may find themselves stockpiling materials, and the bank refusing to make any more payments because some of 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.”
People considering purchasing land with the intention of relocating a house onto that land, need to research their ability to fund the initial house purchase as a bank will not consider the house as security until it is sited and hooked up to services. Likewise, kitset homes may create similar challenges.
“Banks also appear to be taking a dim view of instances where owners want to do part of the work themselves, such as all the finishing work. They are not comfortable with “self-builds” these days.
“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. There may be options available to stall the interest payable until the completion of the building in some instances, but these should be researched before any build contract is signed.
“It is very important that buyers make sure they work 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,” Ms Lockie said.