How to borrow to build a brand-new home
There are a few different ways to build a brand-new home, and a few things to consider when it comes to borrowing for each type of build.
4 minute read
From working with developers to hiring your own architect and builder, there are a number of different ways to build a house. Before you set out on your home-building journey, it’s important to understand the different options, and how borrowing works for each type of build.
Land and build
The most traditional way to build is generally referred to as ‘land and build’. With land and build, either you own the land already and your bank lends you money to build your house, or the bank helps you buy your land and lends you money to build your new home on it.
For both options, the build part of the loan is usually ‘progressively drawn’. This means the balance of your loan gradually goes up as all the house-building bills come in. Because you’re not borrowing a fixed amount at the start, the loan for your build is on a variable (floating) interest rate.
You’ll start paying interest on your mortgage when the first payment happens – this is called ‘drawing down’ your loan. But you won't start paying the principal (amount you’ve borrowed) until your brand-new house is complete and all the bills are paid. For land and build projects there are a few different options:
Fixed contract
This means your build contract price is ‘fixed’, with scheduled invoices to be paid at set stages of the build, like deposit, slab down, framing, roof on, closed in, pre-line, post-line, and Code Compliance Certificate (CCC).
“Despite the name, all fixed contracts have provisional sums to some degree,” says BNZ Home Loan Partner, Frances Hardy. “These are costs that are estimated. If they vary, you may need to cover any additional costs.”
It’s important to consider your cost estimates and how much you intend to borrow. If you’re building on an undeveloped site, make sure the estimated costs include work like connection to services, earthworks, drainage, and engineering reports.
Labour-only
A labour-only build means you pay for the work as it happens, and don’t have a fixed price contract. In this case, you’ll either manage the build yourself or use a building company to look after the project – including paying sub-contractors. As there are no fixed costs, the initial loan approval is based on quotes for the work to be completed, where each contractor is paid directly once their invoice is received. This means there can be a lot of small, irregular, and ongoing drawdowns from your loan.
When thinking about a labour-only option, hiring a reputable builder who’s also happy to be the overall project manager can be a good idea. The construction must be carried out or supervised by a Licensed Building Practitioner.
Off plan or ‘turn-key’
Off plan or turn-key is where you sign up to buy a fully finished new house that’s expected to be completed by a set date. Typically, you do all the design upfront, or the design has already been done and, in some cases, the build may have already started. You pay 10% using your own money when you sign the agreement with the developer, and the remaining 90% on completion and confirmation of Code Compliance Certificate. This is funded by any remaining cash and your new home loan.
“These builds are a lot simpler,” says Frances. “The price is agreed and you start your loan at the end of the build, so loan repayments only begin once you move in. You may pay more on a turn-key versus a traditional build as the builder will have to pass on their financing costs as part of the contract cost.”
Once you’ve decided which home-building option is best for you and you’re ready to take the next step, you can find out how to apply for a loan.
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