Financing your construction goals.
When you decide to build or renovate, you get to create something that’s brand new, energy-efficient and exactly how you’d like it. To help you plan, here’s a summary of steps from financial planning to project completion.
Whether you’re building or renovating, one of the most important things to consider is the type of construction contract you’ll have with the builder or tradespeople. There are three main options. They have different effects on how hands-on you need to be, the likelihood of cost over-runs, when you make payments to the builder and how your home loan is set up.
This is basically a fixed price contract to fully complete a home or renovation according to the specifications in the contract. There can still be some cost over-runs, for things called PC Sums in the contract. These are estimated costs that won’t be certain until the work starts and what’s required becomes clear. Excavation is a common example and some renovations in older homes can be another. The builder manages all parts of the project for you. You pay a deposit at the beginning and the rest when the project is completed.
This is much the same as a turnkey contract, except you make progress payments at specified stages of the project.
These are more difficult to manage and harder to finance. You’ll need someone who has experience in managing construction projects and associated contractors. Basically, each contractor (tradesperson) is paid separately either to do specified jobs including materials, or for their time (labour-only). The risk of cost over-runs is much higher. In fact, some lenders insist on fixed price contracts instead to avoid this problem. Partial-build and labour-only contracts are often used for relocatable older homes, kitset and pre-built new homes. For these homes a lender will normally only lend up to the land value, until the home is permanently fixed to the land. They’ll also typically include a 10 to 20% contingency in the loan for cost over-runs
After some careful thought about the best type of construction contract for your situation, it’s time to look at how much you could afford to spend and the costs involved in your preferred new-build or renovation project.
Whether you’re planning to build or renovate, lenders consider the value of the home when the project is completed. Your ability to meet the required repayments will also affect how much you can borrow. When renovating, the amount you can borrow for the project will depend on how much you still owe on any existing mortgage.
Building and renovation loans are often designed to be drawn down (borrowed) in stages, to match when you need to make payments. This can help reduce your interest costs in the early stages. Most of these loans have a floating interest rate until the final drawdown is made, then you can switch to a fixed rate if you wish. Some lenders also offer interest-only payments during the progressive drawdown period. To get some idea of your borrowing power and explore mortgage repayments, see our handy mortgage calculators.
To buy a house you’re going to live in, you normally need a deposit that’s at least 20% of the finished property’s valuation. For an investment property, it’s usually 40%. Home loans are often available with a deposit of less than 20% for first home buyers and new-build properties, but not always.
The deposit required for a construction loan depends on the type of construction contract. For a fully-managed turnkey contract (like in a group-build development) it might be only 10%, but most are around 20%. For a labour-only contract you’ll typically require a deposit of at least 35% of the finished valuation. With relocatable and pre-built homes you can only borrow based on the section’s value, until the house is permanently connected to the land. See our guide to new-build construction loans.
If you’re renovating, you can usually borrow up to 80% of what your home will be valued at once the project is complete, provided you can afford the new repayments. If you have an existing mortgage, the amount still owing is included in that 80% total. You can either increase your home loan with your existing lender or refinance with a new lender. Refinancing means getting a completely new mortgage and using it to repay your existing one in full. For more, see our guide to refinancing.
If you’re a first home buyer and you’ve been contributing to KiwiSaver for at least three years, you may be able to make a first home withdrawal and/or apply for a First Home Grant from Kāinga Ora. For more, see our complete guide to first home loan grants and KiwiSaver.
Whether you’re a first home buyer or not, family members or other people can contribute to your deposit or renovation costs if they wish.
If they do this as a gift, the mortgage provider will need them to sign a document saying you don’t have to repay the money
If it’s a loan, it will reduce the amount you can borrow unless they sign a Deed of Acknowledgement saying the loan doesn’t have to be repaid until the property is sold
If they guarantee to take responsibility for your loan if you can’t meet the repayments, the lender will take a mortgage over their home as well
It’s important that everyone gets independent legal advice before providing a gift, loan or guarantee. For more, see our guide to how parents can help their children buy a home.
Construction loans can be more complex than standard home loans. Even if you’re just increasing your home loan to renovate, there will be important options to explore. A good mortgage adviser (broker) will work with most of the main lenders. They know the various products’ details, so can quickly suggest and explain the best options for your situation. They can also access or negotiate sharp interest rates and will work with you from application to final loan drawdown. Advisers are paid by the lender you choose to go with, so there’s normally no charge to you. They also save you a lot of time shopping around, as well as providing peace of mind that you haven’t missed something important. To connect with some of the best mortgage advisers in New Zealand, check out our free find-an-adviser service.
Once you’ve sorted your deposit and chosen a lender, the next step is to get pre-approval for the amount you can borrow. This will just be an indication of the likely amount, so you can plan with more precision and confidence. It’s certainly not final loan approval, but it will save time when you get to that stage.
The construction costs will depend on market-driven pricing, as well as the location and the nature of your project. It’s also important to include a healthy allowance for cost over-runs and unforeseen expenses. To help you get started, here’s a list of the main costs:
Drawings and detailed construction plans from a draftsperson or architect
Construction services – quantity surveyor, engineer, project manager, builder and other tradespeople
Construction materials – if you don’t have a fixed price contract, a quantity surveyor or experienced builder can provide a cost estimate
Lawyer’s fees for mortgage documents, construction contracts and any dispute resolution
Council charges for LIM reports, other documents, resource consent and building consent
Construction insurance (contract works insurance) - before work starts, check your contract to see whether your builder has this cover and talk with your home insurance provider about your existing cover during a renovation
Utility connections – water, gas, power and internet
Your accommodation costs during a build or renovation period, as well as moving/set up expenses
Landscaping, fencing, paths and walls
Cost overrun allowance – it’s essential to have one. If you don’t need all of it your loan will simply end up in better shape than you expected
Now that you’ve a good idea of what you’d like to do and how much you can afford to borrow, it’s time for careful project planning before any construction begins. Doing this well will save you time and prevent expensive loop-backs or delays later on. It also gives you peace of mind during the busy time to come. Here are some tips to help you get the planning stage right.
Often referred to as your support team, these are the people you’ll come to rely on a great deal. Choosing the right people usually comes down to their expertise, experience, reputation, cost, availability and personality. They need to be people you can trust and feel comfortable working with, especially if things get challenging and stressful.
You’ll typically need a lawyer, finance specialist or mortgage adviser, civil engineer (if you’re unsure about the land), project manager, architect or draftsperson, property valuer, quantity surveyor (to prepare costs and/or check quotes), builder and other tradespeople. You’ll also need the ideas, ears and cheerful support of friends and family.
With a support team in place, a section secured, and building or renovation plans finalised, you can begin the regulation and compliance paperwork. Here’s what you’ll probably need.
Consents - a building consent, and possibly resource consent, from your local council. Once you’ve lodged your application it can take up to 20 days to get approval; longer if more information is requested.
Valuations - you’ll need a forecast registered valuation for the finished project, so you can get final loan approval. Your lender may also require ‘as-is’ valuation reports at set stages of the project, to check how things are tracking.
Insurance - you’ll need contract works insurance in case things go wrong, even if you’re just renovating. This cover needs to be in place until the project is complete and gets a final code of compliance certificate from the council. Your builder may have the right insurance, but always check the contract with your lawyer to be sure.
A building contract specifies the details of the project, i.e. the work to be done, who will do it, when it will be done, the costs involved, when payments are due, and how delays and disputes will be dealt with. If you want a loan for work costing more than $30,000 you have to have a building contract.
As we mentioned earlier, there are three main types of building contract to choose from:
Turnkey construction contract
Build-only contract
Partial-build or labour-only contracts
To reduce the risk of cost over-runs, most lenders require a turnkey or build-only contract. Partial-build and labour-only contracts are typically used for relocatable and pre-built homes, as the lender will only finance up to the land value until the home is permanently connected to the land.
You should always get independent professional advice and talk with your lawyer before signing a building contract.
For more, see our guide to new-build construction loans and contracts.
This is the final step before construction can begin. It’s when your lender confirms the amount they indicated they’d lend in their conditional pre-approval. You may need to meet new conditions, depending on the type of construction contract and build you’ve chosen. These will be specified in a loan approval letter from your lender. Your mortgage broker or lender will guide you through the loan approval process.
Review all contracts, building consents and insurance policies with your lawyer to ensure they’re happy with them and you understand everything
Sign the construction contract and pay the initial deposit
Get a valuation report and a tentative value for the property once the project is completed
Check with your lender that you have met all conditions
Apply for confirmation of full loan approval
To provide full loan approval your lender will typically need you to give them copies of the resource and building consents; a signed building contract; valuation report; and evidence the property will be insured until the construction or renovation is complete and a code of compliance certificate has been issued by your local council.
At last, construction work on your project can begin. Your lender will have agreed to a final drawdown on completion or progressive drawdowns during the project, according to your construction contract.
If you’ve arranged progressive drawdowns these may have to be on the floating interest rate until the final drawdown is made. Some lender’s construction loans allow these to be interest-only payments, to help reduce your costs during the project. To approve each progressive drawdown the lender may need copies of the builder’s invoices to check they match the payment schedule in the contract. They may also require actual valuations at each stage to ensure the agreed maximum loan-to-value ratio is not being exceeded.
Any cost over-runs need to be managed carefully and your lender must be kept informed, whether you’re making progressive drawdowns or just full payment at the end. It’s important to check your contract to see whether each over-run is allowed to be on-charged to you. Because cost over-runs can happen with any project, it’s important to complete and pay for the essentials first and nice-to-haves later. That could mean making sure the construction is almost complete before deciding which tapware or appliance models you can afford to buy. The last step when building or renovating involves project completion checks and drawing down the final payment.
Once the construction work is finished, its time for project completion checks before drawing down the final payment.
The required council and resource consents are completed
You’re happy with all work done or have brought any defects, such as poor finishing, to the builder’s attention and they’ve been addressed
The builder has done a final building inspection
You have arranged house insurance with a suitable replacement value
The council’s code of compliance certificate is complete or the inspection is due soon
The building site is tidy, all waste is removed and you have been left copies of all warranties and dated purchase receipts, user manuals, cleaning and servicing guides, paint details and so on
A final registered valuation and a valuer’s certificate confirming the project is complete
A copy of the council’s code of compliance certificate
Evidence that the property is fully insured and your lender is recorded as the mortgage provider on the policy (your lawyer will also need this)
To learn more about house, contents and mortgage insurance, visit our sister information website insurances.co.nz.
Whether you’re planning to build a new home or renovate an existing one, you’ll probably have a long list of questions. That’s why you need a team of support people who provide essential information throughout your build. To get you off to a good start, here are some of the most common questions people ask.
Assuming the loan sizes are the same, this will mainly depend on your construction contract. A fixed price contract for a house and land package with a well-established construction company will present minimal risk to a lender. In addition, new-build home loans are usually available with a deposit as low as 10%, because they’re not included in the government’s loan-to-value ratio (LVR) restrictions. For more see our guide to new-build construction loans.
The easiest way is to use our handy mortgage calculators to work out a budget, your borrowing power and likely home loan repayments. Then you can compare what you can afford to pay, with the prices for group-build house and land packages with a floorplan you like and in the area you’re considering. If you already have a section, ask a few of the larger building companies for the typical cost to build the home you’d like on the land you have.
If you have a turnkey construction contract, where you pay an initial deposit and the remainder on completion, then the loan will be much like a standard home loan. If you have a build-only contract, with payments due at set stages of construction, then the loan will allow progressive drawdowns. Progressive loans have a floating interest rate during the drawdown period and may be available as an interest-only loan for that time. For both types of contracts, lenders use a registered valuation of the completed home when deciding how much they’ll lend, along with your deposit and the repayments you can afford of course. For relocatable and pre-built homes, they’ll only lend based on the land value until the home is permanently attached to the section. For more see our guide to new-build construction loans.
The only way to answer this for your situation is to cost up the renovation you have in mind, check you can afford to do it, then compare that with houses in your area that already have what you want. If there are other areas you’d be happy to live in you could include those as well. The best way to cost up a renovation is to work out exactly what you’d like to do or talk to a designer about what you’re trying to achieve, and then pay an experienced builder or quantity surveyor to estimate the total cost, including things like council consents. You should also include a healthy allowance for cost over-runs and unforeseeable challenges, such as rotten framing.
Most people increase their existing mortgage, either with their current lender or by refinancing with a new one. Your renovation loan plus your existing mortgage balance can usually be up to 80% of your home’s estimated value once the project is finished. You’ll need a registered valuer to provide this estimate. If your construction contract has a schedule of payments due at set completion stages, your lender will arrange for these amounts to be drawn down as required. That way you don’t have to borrow and pay interest on the full amount from the very beginning.
Obviously, this depends on the renovation you have in mind. The best way to find out is to talk with an experienced builder or quantity surveyor. There may be more than one way to achieve your goals, so it can be worth hiring a home renovation specialist or designer first. In the meantime here are some very approximate estimates. An extension costs about $3,000 per square metre. A basic kitchen renovation can be about $25,000. A bathroom refresh is about $10,000, but if you’re changing plumbing locations or making structural changes it can be $20,000 to $50,000.
Building from scratch or remodelling an existing home requires a different home loan approach. It also means keeping a sharp eye on costs, especially during times of inflation. Here’s some background reading to build a foundation of knowledge.
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Before you start talking to lenders or a mortgage adviser, brush up your knowledge about building costs and construction loans. Our Learning Centre has informative articles and guides that can help you to understand the options and make good decisions. They’re all written by expert authors and checked by our panel of mortgage advisers.
