How does a building loan work? I can I get a building loan?
Yes, they can be confusing, and intimidating! Many people dont even bother applying because of how complicated they seem.
But it doesn’t have to be complicated!
Let me try to appliance how a building loan works, from start to finish, in the most simple sense.
Management and careful planning of your budget is one of the most essential considerations when applying for a building loan, and building your own home.
The basic rule.
Only build what you can confidently afford and do not plan to spend the entire available budget. Some funds should be kept in reserve to provide for unforeseen costs.
And there will ALWAYS be unforeseen costs that can be disastrous to your building project!
The last thing you want is a partially complete house, with no funds left!
Ensure that the builder are you hire has an excellent track record and is registered with the all the relevant recognised organisations.
Quality and type of home built.
Will the proposed dwelling be within the style and value range of homes in the vicinity? This is an impact on the marketability of the property.
Do the neighbors property is the detract from or enhance the value of the stand. Pay attention the your neighbors houses. they affect the value of your house too!
What effect could future additions and alterations have on the property value. For example, will it be cost-effective, will it increase the value, or will the property be over capitalized for the area?
Building a high spec house in a low spec area is going to be a waste of money. Even if you get a good deal if you decide to sell, you’ll never get your money back.
All these aspects could affect the cost of the building of your home and the marketability of the property.
Buying your stand.
If you’re not buying a stand directly from a developer, financial arrangements, legalities and procedures are much the same as for buying a home.
There are some special factors you need to take into account:
- The stand must be within a proclaim township. Be wary of buying a stand that has yet to be proclaimed, as this may never take place or may take years to coming to effect.
- The land is only formally registered in your name once the full purchase price is paid.
- The bank requires proof that you have purchased the land.
Financing a building loan.
When applying for home finance, the bank requires a copy of the building plans and the signed contract from your builder. He must be a reputable builder and approved by the bank. If your builder is unknown to the bank, three references on homes previously built by the builder will be required.
On receipt of the plans and signed contract, the banks assessor will inspect the site and determine an assessed value on the property, including the proposed improvements.
The assessment is market related, based on recent sales of comparable properties in the area.
The assessor will estimate the cost to complete the building work as per the plans and specifications. Progress payments will be based on the contract price or the banks estimate cost to build, whichever is highest.
If the loan granted is less that the the contract price or the estimated cost, the onus will be on the customer to finance the difference, referred to as the shortfall between the two.
A major factor to determine when calculating the shortfall is a percentage of the contract price (including the land) which the bank is prepared to finance. A rough guideline is 60% on vacant stands and 80% on land with improvements.
This may vary and it is important to negotiate this figure upfront
The shortfall amount is calculated as follows:
Loan applied for:
Less amount owing on land:
Amount available for building:
Less estimated cost for contract price whichever is higher:
The shortfall is the amount you will have to pay to the border for the progress of the contract to a break even point based on the percentage of work completed calculated as follows.
Shortfall x 100 = _________%
Est. cost./Contr. price
Once this point has been reached and work has proceeded beyond break even, only then will the bank commence with the progress payments, provided that the home loan has been registered and the necessary/required documents received.
When a shortfall situation occurs, you will be informed and pertinent conditions will be included in the letter of grants.
The assessor sole obligation is to the bank. He has no obligations to the loan applicant or building contractor. He must act independently and must not be influenced by any person.
In the case of building loans, it must be understood that the sisters visit cannot constitute a comprehensive supervision of the erection of the building, and cannot be used as arbitration in any dispute between the client and the builder.
Assessment method – special residential properties.
The only acceptable method to the bank is the comparative method. The property being assessed is being compared with the characteristics, advantages and disadvantages of similar properties recently sold.
Role of the property assessor.
The banks assessors main role is to safeguard the bank from loss if a mortgage defaults.
This is done by inspecting and assessing the following
- Completed properties for which mortgage loans have been applied (ordinary loans and further advances).
- Vacant land and the plans and specifications of buildings to be erected.(Building loans)
- Building work in progress progress. (Progress payments and routine inspections)
Definition of market value.
For mortgage purposes, market value is defined as the probable price that a willing and inform purchaser would pay a willing and informed seller in a normal open market transaction at the date of event of evaluation with the property exposed to the market for a reasonable period with neither party under any compulsion other than their wish to transact.
Additional documents required for building home loans.
On receipt of the letter of grant from the regional home loans office, the following documents need to be submitted to the home loans division.
- Minimum requirements for the construction of buildings bonded to the bank. (This form must be signed by the customer and the contract/builder). The details on this form inform the contractor or builder of the banks requirements, for example that the bank must inspect the trenches prior to commencement of building and what type of materials to be used.
- Building loans schedule of information and regulations. (This form informs the customer of his responsibility during the building of the dwelling.)
- Tender. (This form states that the contractor or builder will comply with the plans and specifications submitted to the bank for the sum stated)
- Contractors waiver of lien and insurance responsibility (This form states that the contractor in respect of the property to be built waives in favour of the bank, all rights over the building and that any loss or damage remains the contractors responsibility until the completion of the building.
- Builders all risks insurance. Once the documents have been signed and submitted to the bank and the bond registered, the builder may begin building.
As work progresses, the builder will request payment. You will then have to complete a progress payment request with the bank.
The banks assessor will then assess the value of the work done and calculate the amount of money to be retained to complete the work, based on the work done to date.
The banks are assessor does not recommend amount to be paid, and no funds will be paid for material on site or poor workmanship.
If the request is for more than the assessor finds complete, the bank will only pay out on the lesser amount.
Never sign a blank progress payment form and hand it to the builder. Please bear in mind that it will take up to 5 working days for progress payments to be processed by the bank.
There will usually be 3 to 4 progress payments made prior to the completion of the house and interim interest will be calculated on those amounts paid out.
Part payment should be made as soon as progress payments have commenced. Alternatively, provision must be made to cover interim interest which can mount up during the contract period.
Failing this, a portion of the final progress payment is to be found from other funds, as the interim interest would have utilized part of the loan, which was granted.
On completion of the contract, when the builder will call for final payment, inspect the house to satisfy yourself that it has been completed to your satisfaction. You will be requested by the bank to sign a letter of satisfaction advising them that you are satisfied with the completed house.
In addition, a signed copy of the certificate of occupancy is which is obtainable from the local authority must be forwarded to the bank before the final progress payment will be made.