The fine line between building a dream or creating a nightmare.
Building a home from scratch is the dream of many borrowers, and for those who are well educated on the process it can be quite a painless experience. For those that haven’t done their research however, they can find it a frustrating and at times, drawn out experience. In this money musing, we aren’t going to tell you the positives of construction - for they are pretty obvious. Instead, we are here today to warn about the hiccups that may occur and how you can hopefully avoid them.
Lets start with basics - what is a construction loan? I know it's pretty obvious - it is the purchase of land to build a property on. Simple, right? Maybe until we get into the hiccups:
In order to move your loan to the process of settlement, your vacant land needs to have titles. Unfortunately, often these blocks aren’t titled straight away, and thus your construction will be unable to commence until this is done. While you may be happy to wait for the construction to get underway, your bank won't likely be. Finance approvals have expiry dates, thus if titles are taking months to be sorted, this could mean that you will need to re-do your application with the bank. In fact, we've encountered this - we've had clients who have had to wait to years for titles to be processed and as a consequence, they had to go through the loan process two and even three times.
The flip side of this is when your land is titled and you have a set finance due date. Often, your builders' documentation will take around 8 weeks to be completed, but if your finance on the land purchase is due within 4 weeks with no room to budge, you will need to look at splitting your loan and financing the land first. For first home owners what this means is you will have to pay stamp duty on the land upfront, rather then having the First Home Owners grant take care of it. Don't stress though, as the state revenue will refund this amount to you once your construction begins. Be sure to ask your settlement agent for the forms to do this. Keep in mind that it will mean having more funds upfront to complete your construction.
Contract Price & Loan Amount
When you initially see your builder, you will sign a basic build contract. This contract will usually cover all requirements the bank will need to consider your new property acceptable to live in. Now, when you see your finance broker (or bank, if you still haven’t caught on to the awesomeness that is a broker) they will let you know the maximum amount you have for construction. The key is to make sure that your contract is more than that amount. Not only that, you will need to pay these before the bank will release any funds for construction. You wanna spend big? Fine! Just have the cash to cover it straight up.
Doing the work yourself
To have bought a home, you are already a saver, and some may say frugal at times. If you decide to have a mate or yourself finish anything and thus remove it from your contract to save dollars, be prepared that the bank may ask you for quotes for this work and may require you to have these funds to cover that as well. Going to paint the walls yourself? We have experienced banks that will actually request an invoice for the cost of the tins of paint to do this and a statement of your bank account to show the funds to pay for it.
So hopefully I haven’t turned you off building all together. I just want you to be prepared. Hiccups may happen but as long as you communicate with your land agent, broker and builder on a regular basis, they will be prepared to assist if anything goes wrong. Now is the time to become pedantic about your finances. Keep a spreadsheet and make sure any communication that you send or receive comes in some form of writing for future reference if you need it.
Build your dream, not your new nightmare.