May 16, 2014
Construction : House and land packages – What can you borrow and what must you pay for?
I assume you have been reading my blogs on construction and understand terms like TOC valuation, progress payments and shortfall – if not – on the way through this blog I’ll add a link to help you.
It can be so much fun to build your own home – it literally is about building your very own dream. The first step and probably the most important, is to find your block of land.
People often start the other way – and looking at display homes is truly great fun!! If only the money barrel was bottomless!!
No matter where you start, the house salesperson will pull you back to the block of land because the house you like must fit the block of land you have.
There are TWO separate purchases – and each must be financed;
- The land is a single payment – with its own settlement
- The house is a series of progress payments to the builder – the first payment (when the foundations and slab are poured) is usually defined as its “settlement”
What makes a house and land package a “package”?
It is ONLY a package if the builder who is selling you the house, also owns the land. To be specific, that means - the VENDOR on the land contract and the VENDOR on the build contract are the same. This is as rare as the proverbial hens’ teeth.
Most “packages” are sold in display homes using that language to make you think that you MUST use that builder for that land. The builder probably has a few blocks on hold with the land developer – it’s not a package at all.
We should continue now by removing “package” as a meaningful term in lending – we simply have land and a house – two transactions;
- The builder will build your house on your land
- I will “build” your house finance on top of your land finance.
- The land will settle and you pay that loan (usually P&I) until the builder starts
- The land loan is then “consumed” by the construction loan and switches to I/O as Progress Draws occur until handover (you get the keys).
- At which point it switches back to P&I and hey presto! – You have your final home loan...living the Dream!! As they say.
Now for an important factor which must be considered. You need to live somewhere while you build. This could well be renting, meaning you have rent and a construction loan in your lives, so it’s always good to build with a bit of a cash buffer behind you. For first home buyers, it could be understanding parents who let you shift back in for a while.
Let’s turn back to the fun now – designing and building your home. What can you borrow? What must you pay for?
In most cases you will pick a design from a builder and add your own modifications and selections. You will in all likelihood add items outside of the contract – typically;
- Perimeter paving
- Floor coverings
- Light fittings
- Air conditioning
If you wish to borrow for these then I need fixed price quotes from your supplier of choice.
At some stage during the design process you will make your selections for;
- Kitchen appliances
- Tap fittings
- Electrical – no. of power points and their type
- The “facade” of your choice
- Roof material
Once the contract and the final plans (contract plans) are dated and signed you can still make changes – these are called variations to the contract.
A good builder will wait until all of these processes have been completed at which stage I am given the “build pack” for bank valuation.
If there is a shortfall between the contract price and the bank valuation you need to fund that from your own cash.
Variations and Shortfalls are a very important pause point, both of which I have covered in a previous blog. If you'd like to refresh, click HERE to have a read.
Even if the bank valuation matches the contract price there will still be a gap between the loan amount and the contract price. That is completely normal. Before the bank picks up payments by way of progress payments you will need to put in your contribution first – also completely normal.
Progress payments are laid out in the contract. The builder gives you an invoice at pre-planned stages. You sign them to say you are happy with the work, fill in a form that the bank will have given you previously and email both to me. I will look after it for you from there – that part couldn’t be simpler.
All sounds difficult? It is to a certain extent. Construction should only be entered into with “your eyes open”.
However - it is such fun to see your very own dreams come true and then move in “to live your dreams”.
I thoroughly enjoy construction finance for this very reason and as your trusted expert in construction finance we will walk the path together.
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