This article was originally published on Stuff.co.nz on 20 May 2014.
Building a house is said to be one of the most stressful things you can do, but getting a mortgage to do so doesn't have to be.
Are banks 'build-friendly'?
Mortgages on new builds are slightly more complicated than if you're looking to buy an existing home, but that doesn't mean banks are not keen to lend.
The current housing shortage in New Zealand means that banks see construction as a growth area says Shaun Drylie, ASB's general manager of product and strategy for retail and business banking.
"Although they are a little bit more complex, we're definitely keen to use our experience to help simplify things for customers.
What the bank needs to know
There are plenty of building horror stories out there, so if a bank lends you money it will take an interest in the builders and contracts you choose and the robustness of your budget and estimates.
Depending on the complexity of the build, your bank is likely to want either a quantity surveyor or a registered valuer to go over your plans and work out both the likely costs of the build and the final value of the project - to make sure the completed value of the property provides adequate security value for the loan.
"If you put a $1 million property in a part of the country where the piece of land is worth $30k, the value of the property won't necessarily be $1.03m," Drylie says.
How does the loan work?
Unlike a normal mortgage, you won't get one lump sum. Instead your bank will release money as building progresses so you can pay your builders as work is completed.
This is done to protect you from paying money upfront and the work not being completed. "If the bank releases the full loan to the customer which is then passed on to the builder and the property is not completed, then the customer could be left out of pocket. They've spent the money, but haven't got the value," says Drylie.
Interest is only charged on money that has been drawn down. As with any other mortgage you can choose to fix or float all or part of the loan as it's released.
What if things go wrong?
A fixed-price contract is one safeguard against budget blowouts, but otherwise Drylie says a good rule of thumb is to factor in roughly 10-15 per cent on top of the estimated build cost as a contingency.
If things get so bad that even the contingency fund won't cover it, all is not necessarily lost. An incomplete building isn't worth much to anyone, so if things go terribly wrong, it's likely your bank will try to work with you to help you finish the build.
"It's in a bank's interests to assist a customer to complete a property because an incomplete property exposes both the customer and the bank to risk," Drylie says.
As well as arranging home insurance for your home when it is complete, your bank or insurance company can ensure your building is protected through the stages of construction.
Grand designs or building package?
The loan-to-value ratios introduced by the Reserve Bank last year, requiring most home buyers to have a 20 per cent deposit, don't apply when you're building a house.
However, if you have less than a 20 per cent deposit Drylie says banks are likely to look more kindly on a fixed-price contract with a large building company than a 'Grand Design' type project with a smaller builder.
"As larger building companies have strong processes in place you'll find that it will be easier for the bank to lend at higher loan-to-value ratios on fixed price contracts" Drylie says.
That's not to say that banks aren't open to more complex plans or smaller builders, it just means if you want those options, you'll probably need a bigger deposit.
- Do your homework: A bank doesn't care what colour your curtains are going to be, but they want to make sure your building contract is sound.
- Plan ahead: It's better to factor in a worst-case scenario at the start than be left needing cash at the end.
Click here to find out more about getting a home loan with ASB.