Building a home can be an extremely rewarding experience but it can also be a time consuming and frustrating task. Dealing with builders, contractors, designers, banks, the list goes on and on, but the most common question people have is “how do you pay for it all?”.
Buying land is the same as an established home. Some banks will lend 95% to build straight away but most only lend 90% which means a min 10% deposit plus costs.
Payments are made on the land loan as well as normal rent or existing home loan repayments, however, land loans are often interest only.
Banks usually only allow a max 5yrs term on land loans so the building process should be considered soon after the land is purchased.
The Building Contract?
Before deciding on the block of land it is best to consult a builder first to discuss house designs and obtain quotes.
It is best to provide builder quotes with the land loan application, this way pre-approval for building is obtained prior to buying the land. An approximate cost to build will suffice at this stage.
Once pre-approved details with the builder such as tile colour etc. can be discussed. Once details are finalised, the builder will prepare a Fixed Price Building Contract. This contract locks in the costs and details everyone’s responsibilities during and after construction.
Independent contractors doing certain jobs rather than the builder will need to be quoted separately and these quotes provided along with the building contract.
With a Fixed Price Building Contract and all Independent Quotes, a formal application for finance can be made.
When does the Bank pay the Builder?
Building is done is stages. These stages are set out in the Fixed Price Building Contract and can vary. At the end of each stage, the builder will require a payment before continuing work on the next stage.
Common stages are:
|Deposit||5%||Before plans are drawn and submitted to council for approval|
|Base||10%||Once slab is poured and completed|
|Frame||15%||Outer walls and roof frame are erected|
|Enclosed||35%||Roof is on and building is fully enclosed with doors and windows|
|Fixing||20%||All internal fixtures are in showers sinks etc.|
|Completion||Balance||Hand over keys|
After each stage, the builder will send an invoice. The work should be inspected and if satisfactory, invoices are sent to LendFirst who will facilitate the payment from the bank to the builder.
During construction, monthly interest on the loan needs to be paid. This will be small at the start but will increase as the loan balance increases each time the builder is paid.
Once complete, the land loan and construction loan revert to one standard home loan with regular monthly principal in interest repayments.
House and Land Packages?
Builders and Developers may build a pre-designed house with no payments until construction has finished. This is the similar to the purchase of an established home.
There are no progress payments with this arrangement and as there is no loan during construction. No loan repayments are needed until settlement takes place.
There are a lot of restrictions on what can be built in these circumstances.
These transactions are processed the same as an established home and first home buyers may be eligible for the $15,000 Great Start Grant.
Qld $15,000 Great Start Grant?
First Home Buyers in Qld may be entitled to a $15,000 grant from the Qld government if they are building a new house.
For details on the full eligibility criteria, go to the Great Start Grant website, however some general rules are listed below:
- Over 18yrs of age
- Australian Citizen or Permanent Resident
- You or your spouse have not owned property in Australia before
- Have built a brand new or substantially renovated home
- Occupy the home as your principal place of residence
If you are getting a loan to build your home, the Great Start Grant application can be submitted to the lender for processing and if approved is generally paid to your bank account at the Base stage claim.
Most lenders will not consider the $15,000 grant as genuine savings.