Financing the dream - what is the financial process when constructing a home?

March 22, 2017
Beth Measday

So you’ve found the perfect block of land and selected an amazing floorplan. Now you just need the finance to achieve the dream!

Purchase costs:  Generally, associated land purchase costs will total around 5% of the purchase price. Depending on location, lenders may want you to contribute a further 8%-12% in savings. So this means that you will initially need to come up with 13%-17% of the purchase price of the land. Ultimately you will also need to find a further 5% of construction costs. This may come from a variety of sources including a government grant (for first home buyers), savings, gift or equity built up via extra payments on your land loan.

Contracts:  Normally there are two separate contracts involved – the first one for the land and a second contract with the builder. These are NOT usually the same entities. Quite often land is advertised as a “house and land package” but you usually have the right to choose whichever builder best meets your requirements. Both contracts will require a deposit, usually between $2,500-$5,000 for each contract. For the land, this deposit is held in trust and will ultimately form part of the purchase price. The land may take anywhere between 30 days and 180 days to “settle”, depending on whether it is part of a new subdivision or if a title has issued for your particular allotment. For the builder, a contract is signed once you have decided upon a house design and floorplan. Your deposit covers the initial costs of an engineer’s report and plans and elevations of your new home. This deposit is not refundable if you decide not to proceed further but does form part of the purchase price if you do proceed.

Variations:  Your building contract will list various inclusions but will also include some allowances for items that may change. These include “footings” (actual cost will depend on the engineer’s report), selections (such as tapware, tiles, flooring, cabinetry, electrical, appliances, etc) and sundry services such as site excavation, soil removal, air-conditioning, paths and driveways, connection to stormwater, etc. These items are known as “variations” and can dramatically affect the end price of your new home.

Build pack:  Ultimately, your builder will provide you with two complete sets of documents called a “build pack” – one set for you and one for your lender. The build pack will normally include the building contract, building quote detailing inclusions, building specifications, plans and elevations, variations and copies of insurances that the builder is required to have in place.

Sundry quotes:  Your lender will invariably require you to also obtain quotes for “off contract” items which may include floor coverings, air conditioning, paths, driveway, fencing, retaining walls, etc. Some lenders also require quotes for landscaping and soft furnishings. The sundry quotes will be included in the lender’s valuation.

The loan:  Once all the above contracts, build pack and quotes are submitted, the lender will usually arrange an “off the plan” valuation. This valuation will determine the maximum amount that the lender may be prepared to lend for this property, subject to affordability. This will also determine exactly how much money the lender will need you to contribute towards the whole building stage of the project. Once the loan has been approved and loan documents signed, the lender or broker will normally advise your builder.

The building process:  Once the local Council and the lender have approved everything, the builder will commence construction. Normally there are five or six key stages at which the builder is allowed to invoice for the work completed thus far. These are called “progress payments” and will be a pre-determined percentage of the total building contract + variations. Upon receipt of each invoice, the lender will determine how the payment is to be made to the builder, i.e. from your required cash contribution, government grant, loan funds, or a combination of all three. If any funds are drawn from the loan, interest will be charged. Note that interest will be calculated on the daily outstanding balance and will be charged monthly until the end of the building process. Obviously, repayments will gradually increase as the building progresses and the loan balance becomes larger. If possible, it is recommended that you set aside each month the equivalent of what the end loan repayments are likely to be. This will mean that there will always be sufficient funds in your account to cover the loan interest charged monthly. There should also be some leftover savings to cover those “forgotten” expenses such as clothesline, letter box, external lighting, etc.

“Walk through” and “Handover”:  Once the builder has completed everything to do with the building contract and variations, you will be invited to ‘Walk through’ your new home with your building site supervisor.  This is your key opportunity to critically assess EVERYTHING. Your builder will then undertake to rectify everything that you have identified during the walk through and also install such items as the hot water service and kitchen appliances before you make your final progress payment. This payment is usually made at ‘Handover’ in exchange for the keys to your new home. Your lender will need you to arrange building insurance at this time.

“Off contract” items:  Depending on your lender, some or all of the funds set aside for the various off-contract items may be available to access during the building process. However most lenders will only release these funds after handover and usually only against invoices for completed work. For this reason, it is usually a good idea to allow a few weeks after handover to complete the off contract items before moving in.

So there you have it. Building a new home is both exciting and scary, but it helps if you have some guidance along the way from someone with lots of experience in the whole construction process. I have gone through the building process personally on several occasions and on several hundred occasions with my clients, so I have the knowledge and expertise to assist you too!

Mark Scherer 0403 577 287


Posted in: Home loans

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