With a fixed price contract before construction starts, lower loan-to-value ratios and deposit conditions, and a home built to high standards, it’s not surprising that buying off the plan is so attractive, especially for first home buyers. If you are considering building your own home or buying into a brand-new development, here are some things to consider when financing the construction of your new build.
Buying off the plan
Buying off the plan means agreeing to buy a property from a developer before it has been built or while it is still in the process of being built. There are many compelling reasons why buyers choose to buy off the plan.
- Loan to value ratio restrictions don’t apply to newly built homes, which is appealing for first home buyers who may be struggling to save a deposit.
- Buying off the plan can be more affordable because it removes having to pay for LIM reports, building inspections and valuations ahead of an auction which you may not win.
- Homes are built to higher standards and generally require less maintenance, and most are covered by a warranty for the first 10 years.
- A fixed price means potential capital gains if house values improve while the home is being built. However, you need to be aware of possible capital gains tax liability and seek professional advice from your accountant before choosing this option.
Choosing the right type of finance
When it comes to financing a new build, there are a few ways this can be arranged. Here’s a brief look at each of these:
A turn key contract is a fixed price contract between you and the builder for the construction of your new home. It’s an easier option for home buyers because it requires no payments after the initial deposit – which is usually between five and 10 per cent – until the house is completed.
That means you don’t make any loan repayments and you’re not charged any interest until the home is built and ready for you. So you don’t need to worry about covering both a mortgage and rent while your home is being built.
A house and land contract is the most common type of construction finance and one that builders tend to prefer. Similar to a turn key in that the contract specifies a cost to build a home, and is exempt from RBNZ LVR restrictions, the biggest difference with this type of finance is that progress payments are made during course of the build.
What that means is you start paying interest on your loan as soon as the first payment is made, and as each of the progress payments is drawn down and paid to the builder so your loan repayments increase. That means you need to have funds available to pay, not just your house and land contract, but also rent or another mortgage if you already own a home.
Before you choose this option, it’s important you consider how you will manage paying your existing rent or mortgage while your new home is being built. Your lender will also want to see proof of your ability to service both financial obligations at the same time.
Financing a newly built home
Financing a new build is quite different to arranging finance to buy an existing property. That’s why it’s so important to work with a mortgage adviser who understands the complexities of this type of lending. To find out more about construction finance – or to see if you qualify for this type of finance – contact a Mortgage Express branded mortgage adviser today.