New Zealand has a housing shortage, a common type of purchase is newly constructed properties.
While current houses are often in great locations, and you can control the settlement date (move-in date), you often have to spend a lot of money on renovations to put your stamp on it.
With a new build you could potentially have more in-put into the design of the property, thus giving you something perfect for you and your family. All though they say you have to build 7 times to get it 100% right!
In New Zealand you have two common ways to purchase a new build.
One being by a land and build package. These are often in new sub-divisions. The builders have often purchased the land on builders-terms from the developer and need to find buyers to purchase from them. Once you identify the land you want you have to work with that builder who has purchased the land on builders-terms. They may have plans in place for the property to be constructed on that piece of land, however often you can “tinker” with those plans.
On land and build packages you will need to settle on the land first. Once the land is transferred into your name/company/trust the property will start to be constructed. The build will either be turn-key or via progress payments. Turn-key constructions are more attractive to the buyer and you often only put down 10% of the total land and build cost, with the remaining required to be settled once code of compliance has been issued. This has down-sides for the builder as they have to carry the cost of the construction throughout the entire build. The other option is through progressive payments. After settling on the land you pay with cash or loan or a mixture of both in stages throughout the construction. The loan balance increases over time. The loan is interest only. The client will need to put their cash into the land and build first, once cash is fully used up the loan will kick-in. Interest costs increase as the build progresses and the loan balance increases. This can be tricky to manage if you are renting and paying interest costs, this is something to think about while building.
An important note around turn-key contracts. They work well in an upward trending property market. You pay 10% and the remainder on settlement, and if properties are trending upwards, often your property values higher than what you paid for it. However they are not putting people under a lot of pressure. The reason for this is twofold. One, with a turn-key build you are never fully approved in terms of finance. Often you get an approval from a lender for 2 or 3 months. With turn-key contacts you are often not required to settle the loan until code of compliance is issued. This could be 12-24 months after the loan has been approved, which means the bank offer is not void and you have to re-apply for the loan. With interest rates rising, and banks restraining credit, you might not get the approval you had before the build commenced, which would mean you would need to make up the difference in cash savings, which not everyone will have.
The second issue currently with turn-key contracts is the lender often requires a valuation 2-3 months out from completion. Currently I am seeing valuations coming in below the purchase price of the land and build project. The lenders will take the lower of the valuation and purchase price. If the valuation is lower the bank will only lend maximum 90% LVR on owner occupied homes or 80% on investment properties. In a falling market the valuations often come in below what clients paid for it 12-24 months ago, this meaning clients need to put in more cash to make up the difference, and often this cash has been utilised for the deposit.
Constructions loans are complex. They are great as they provide clients the ability to purchase new and allow you the perfect home for your situation. However they do come with risks which an experienced mortgage advisor can help with.
Get in touch with Matt from Lendal Mortgages for all your lending requirements.