new build finance

Thinking of Building? Read Kylie’s Story First

AdobeStock_166205879.jpeg

 

Kylie and her family of five went through the options of buying and renovating and finally decided to build. But how would they service two mortgages? Kylie shares her insights.

 

We’ve had pre-approval to purchase an existing home for a few years now and haven’t had much luck finding anything.

 

The market is very competitive and, because we had an existing property to sell first, any offers we made had to be conditional on selling that property. With cash offers being put up in competition to us, we felt we didn’t stand a chance.

 

We considered selling our property first. However, with a lack of rentals available in Wellington we were concerned that we would end up homeless. Plus, the animals would make that hunt for a temporary rental even more difficult.

 

We also looked at renovating. However, with estimates at over $80-$100k we finally came to the decision that we might as well build.

 

This led to the inevitable question: How could we afford to pay two mortgages?

 

That’s where Brendon, my trusty Velocity mortgage broker (who also happens to be my boss) stepped in.

 

We’ve recently secured a “turnkey” build in Kelson with a small five per cent deposit from the equity available in our existing property.

 

A turnkey is where you place a small deposit down, and only pay the remainder once the property is complete, hence the name “turnkey”. This can be a slightly more expensive way of building, however, there are no additional costs involved, and no overheads to worry about. Our contract even includes the letterbox and planting, and the only things excluded are the curtains.

 

The downside is that the plans have already been signed off with the council, so we have no control over the layout of our new home. However, we can choose the colours, kitchen, carpet and so on. We had a number of plans to choose from, so we picked one that suited our needs.

 

Still, there have been some risks involved.

 

We haven’t sold our existing home. So if the market crashes when it comes time to selling, we’d be in trouble. Worst case, we’d lose our deposit or have to go to court (unlikely, however, let’s not rule it out!).

 

This risk was clearly laid out to us (thanks boss!), however, even if we sell our house for $100k less than the current value, we would still be able to complete the transaction. So we have decided to proceed, knowing that in a slow market, or even if a market correction occurred, we should still be in a position to sell and move on.

 

Another issue is timing the completion of the build with the sale of our existing property.

 

We’re working closely with the agent involved with the new build, and he’s suggested that we put the house on the market once the windows are installed in our new build. We don’t want to have to move twice, however, we realise we may be homeless for a short period of time. Hey, Mum and Dad! Need some borders?!

 

Regardless, we are going to try to line up all the moving parts as best we can.

 

We’re looking forward to our double-glazing and toasty warm home, as well as having an extra toilet to share between all five of us!

 

No investment decision should be taken based on the information in this blog alone. A disclosure statement is available free of charge upon request.

 

Considering building? Here are your financing options

With our current housing shortage, building your own dream home can look mighty appealing. But what will your bank think and is there any government assistance?

 

If you are considering building there are several financing options available. We’ll get to these shortly, but firstly a note about LVRs and the HomeStart Grant.

 

The Reserve Bank LVR rules don’t apply to those building a new home. This exemption applies to both owner-occupied and residential property investors. So this is a great option for those who don’t have the required 40 per cent deposit for an existing property but wish to add to their property investment portfolio.

 

If you are a first-home buyer and qualify for the Housing NZ HomeStart Grant, then the grant is effectively doubled to $2000 per year of membership in the scheme, of up to $10,000 for five years for each member if you are building.

 

So, all this considered, here are your financing options (and remember that each bank treats construction loans slightly differently): 

 

Fixed-Price Contract

Your builder provides a single, fixed price to complete the build. The contract is “all inclusive”. Mortgage repayments need to be paid while the build is being completed, so if you are renting during this process you’ll need to be able to service both your weekly rent and the mounting repayments on the new build. Banks will generally lend between 80 and 90 per cent on the cost of the project.

 

A Turn-Key Loan (Land and Build Packages)

In this case, the property (land and house) is purchased once completed. A contract is generally entered into before building starts and a deposit paid at this stage. The ownership of the property is transferred from the building developer to you once the house is built.

 

These can be a little more expensive than the fixed-price contract option, however, there are no mortgage repayments required during the build process. Banks will lend up to 90 per cent of the price of a turn-key project.

 

Purchasing Land

In the current market, most banks will lend 80 per cent against a piece of land, assuming it is zoned residential and has the services—power, water, sewerage— available. Most banks will only lend 80% if building will commence on the land within 12 months.

 

Build Yourself

If you are a tradie and are building the home yourself or you are project managing the build, banks will lend between 50 and 80 per cent of the build costs.

 

There you have it. If you’d like to talk through your dream home with us, we might not be so helpful when it comes to choosing curtain patterns but we can certainly help get the cash so you can order the right curtains.

The Reserve Bank: Implications for Investors

The Reserve Bank is tightening the screws on property investors. Graham discusses exactly what this means.

 

The new rules state that you now need 40 per cent equity to buy an investment property and if it’s a new build (as an investment) then you only need 20 per cent. So, what are the implications? Basically, heaps.

 

The only good news is that it is kind of too late to do anything about it. Banks are honouring existing pre-approvals at 80 per cent for investment properties but under duress and are looking for any opportunity to get out of having to do so.  Why? Because The Reserve Bank will be severe in their punishment of any bank that doesn’t comply with the new enforced ratios.

 

It all emphasises the need for property investors to put even more thought into their purchase or building decisions and to keep a close eye on those debt-to-equity rations. Getting clarification around what proceeds you will actually end up with is imperative. If you have multiple properties, the banks will retain as much of the proceeds as possible to get the new ratios in place. 

 

What does this mean? Check out the video in this Spin edition for clarity or check out our YouTube account: What banks do with investment property sales.

 

Graham Goodisson is a Registered Financial Adviser with Velocity Financial. No investment decision should be taken based on the information in this blog alone. A disclosure statement is available free of charge upon request.