Applying for a loan to build

Creating your dream home from scratch can be an exciting but daunting journey. Understanding the different steps when it comes to borrowing for your build could help make the ride that much smoother.

4 minute read

When it comes to building a new home, the first step to getting your finances in order is to get a better understanding of your overall financial situation, suggests BNZ Home Loan Partner Frances Hardy.

One way to do this is to talk to an expert who can help you go over your finances. “By sitting down with your lender and looking at your finances overall, you’ll both have a better idea of your financial position and what’s important to you to help achieve your future goals,” says Frances.

Once you've done this, it’s a good idea to make sure you understand the different options when it comes to creating a new home and ways to borrow for each one, including building on your land or buying off-plan.

The financial steps to home-building success

If you already know the type of new build project you want to do, and are ready to apply for a loan, it’s a good idea to understand the steps involved and what you need to do to prepare. Here are seven helpful things to know.

1. Initial approval - The first thing you’ll need to do is apply for conditional approval, sometimes known as pre-approval.  This is an indication of the amount of money you can borrow to finance your land and build, as long as you can meet certain conditions.  Approval will depend on a number of factors, including how much income you earn, your current liabilities (what you owe), household expenses, the amount you can contribute to a deposit, and the type of project you’re wanting to do.

2. Land loan - If you’re buying land to build on, you’ll generally need to have a number of supporting documents to hand before your lender will provide you with a loan. These include a sale and purchase agreement, and a registered valuation.

3. Build loan - As soon as you have a draft building contract ready to present to your lender, it’s time to apply for your build loan. “At this stage you should be well engaged with a lawyer who must review your sale agreement, your build contract, and your finance offer,” says Frances. Once you and your lender are happy with everything and your finance is approved, you’ll be provided with a loan when you’re ready to start your build.

4. Progressive drawdowns - For most types of builds, you won’t receive your total build loan in one lump sum. Instead, you’ll gradually increase your borrowing as you make regular payments to your builder or developer for the work they’ve completed. As you receive the invoices in line with your build contract, you’ll need to email these through to your lender. It’s important to know you’ll only pay interest on the total drawn amount of your loan, so as your build progresses, your interest payments will increase.

5. Check in - When you’re almost halfway through your loan amount, it’s likely your finance provider will ask for a copy of your completed council inspections to date to make sure your build is on track and meeting council requirements.

6. Final payment - Before your final invoice can be paid, you’ll generally need to provide a Code Compliance Certificate (or confirmation of passed final inspection) and a completion valuation. Once your lender has these, they can make your final payment and the builder will issue you with your keys!

7. Insurance  - Don’t forget to arrange your insurance so it lines up with your final handover. Your lender might be able to help you with this.

Tips for a successful build

It’s best to get in touch with your finance provider right at the start of the process, recommends Frances. “An experienced lender will offer tailored advice and guidance, which will help make the overall build process run more smoothly.”

Also talk to your lender if you want to use friends and family who are qualified in their trade to do work for you. “You may have a dad who’s a kitchen maker, or brother who’s a sparky, who can provide a cheaper option than a build firm. Your lender may be happy to look at these circumstances and find a way to help you save money.”

Frances also recommends doing due diligence on your builder. “Timing is a key factor. You may be paying rent and loan interest as the house is built - time is literally money - so working with a reputable builder is crucial.”

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This article is solely for information purposes. It’s not financial or other professional advice. For help, please contact BNZ or your professional adviser. No party, including BNZ, is liable for direct or indirect loss or damage resulting from the content of this article. Any opinions in this article are not necessarily shared by BNZ or anyone else.