Buying a house off the plans that hasn’t been built yet can seem pretty scary. You’re usually signing up to a massive new-build loan for something with thousands of components that doesn’t even exist yet. How do you know what the finished home will be worth and whether you’ll end up getting what you expected?
The good news is there are several advantages to building a new home and a range of construction contracts that help to ensure everyone is seeing the same finished home. In fact, a construction contract is required in New Zealand if you want a loan for any residential building work costing $30,000 or more.
Each type of contract provides a different degree of certainty over the detail of what you’re getting and what the final cost will be. As you can imagine, the degree of certainty will also affect how much of the expected cost a loan provider is willing to lend and how much your deposit will be.
To help you get started with choosing the best way forward, here are some of the reasons people prefer to build a new home and a quick summary of the main types of construction contract.
Benefits of building a new home
Everyone has their own reasons for buying a home off the plans, but they usually include some of the following.
You can get a floor plan that suits the way you like to live and your future goals, without having to endlessly shop around, make compromises or renovate.
With a new home everything is brand spanking, so your maintenance bills will be next-to-nothing at first, allowing you to focus on repaying your loan as quickly as possible.
Healthy and economical
New-build homes can include the latest innovations in home ventilation, insulation and heating. Passive heating from the sun, double glazing, heat and sound-controlling insulation, smart systems, and power and internet connections to suit a modern lifestyle can all be optimised from day one.
Low deposit mortgage
Depending on the type of construction contract you choose, for most new-build homes you won’t need a 20% deposit like you do for an existing property. If you’re building the home to live in, you’ll probably qualify for a 10% deposit loan or, in some circumstances, as low as 5% if you’re a first home buyer.
Types of construction contracts
What are PC sums?
It’s not always possible to cost everything precisely before the build begins. You might not have decided about some finishing details or some things may not be known until after construction begins, such as the nature of the sub-soil uncovered by excavation. These costs may be estimated in the contract and referred to as provisional cost (PC) sums, which means they’re not fixed prices.
Here’s a summary of the different construction contract types to help you get started. Their main difference is the degree of certainty they provide around the final cost.
Turn key construction contracts
The word turn key is used to describe a product or service that’s ready to be used immediately. A turn key construction contract details a property that will be fully finished. It includes things like flooring, painting, major landscaping, paths, driveways and more. They’re usually offered by larger construction companies for complete house and land packages, typically in a new development. With very few estimated PC sums, if any, it’s as close to a fixed price contract as you’re likely to get.
Maximum price certainty
Low mortgage deposits
Turnkey contracts aren’t bound by the Reserve Bank’s rules that require a deposit of at least 20%. Loan providers, such as banks, are allowed to lend up to 90% of a turnkey contract price, which means your deposit could be as low as 10%. In some situations, they may even lend up to 95%. If you’re short on savings for a deposit, but have an income high enough to support the regular repayments on a 90% or 95% loan, this type of contract could be just what you need.
Loan payments don’t start until it’s finished
The other advantage of turn key construction contracts is you pay a deposit at the beginning, then your construction loan repayments and mortgage interest charges don’t start until the property is completed and settled. That can give you some time to increase your savings to cover some of the initial moving-in costs, such as insurance, rates and essential furniture.
Build-only construction contracts
These contracts usually apply if you bought your land separately and are engaging a builder to construct your new house on it. You may have more freedom to customise the home to your needs, ranging from variations on a construction company’s standard plans, to hiring an architect to design the house of your dreams. You may also agree to do some of the work yourself, such as painting or landscaping.
Price certainty can vary
Progress payments are made during the build
Lending is staged to match the payments
Interest-only payments during construction
Most lenders will treat the growing mortgage as an interest-only loan during construction and switch to interest-plus-principal repayments once the home is complete. These construction loans normally have a variable (floating) interest rate. You can usually change to a fixed interest rate home loan once everything is complete.
Low deposits may be possible
Partial-build construction contracts
More complex and risky
Higher deposits are required
There’s a lot of paperwork
Lenders typically want to see a floor plan with specifications, as well as quotes for all contractors and materials, before they’ll approve a mortgage. You’ll have to provide a payment schedule, and then copies of invoices to be paid, before each staged drawdown of your construction loan is approved.
Valuations will almost certainly be required at each stage, so the lender can identify cost over-runs as early as possible. They’re not trying to be difficult; they just have a responsibility to ensure they can recover their money if things go wrong during construction and you can no longer meet your home loan repayments.
Relocatable and pre-built home construction contracts
Quicker and more tangible
There’s still work to be done after delivery
Lending restrictions apply
Most of the paperwork is still required
- Take time to understand the various types of construction contracts, and weigh up the pros and cons of each for you and your situation
- Organise a support team, such as a friend who has built before, a lawyer, a builder and a project manager if the builder’s not acting as one
- Make sure your builder is a Registered Master Builder, certified builder or licensed building practitioner
- Check your finances, create a realistic budget and include an allowance for the inevitable over-runs and unforeseen expenses
- Talk to mortgage providers and brokers as early as possible to find the best deal, get an idea of how much you could borrow and find someone you feel will help you through the entire process
- Be aware that some lenders may be offering special low mortgage rates for the first few years if you’re building a new house
- Don’t sign anything until your lawyer has reviewed it and you understand every detail