House And Land Packages – Financing Your Build

7 June, 2017 | Jennifer Edwards

So you’ve found your dream home and it is a house and land package, how does the finance work?

The key thing to remember with any building contract (which includes house and land packages) is that your finance documentation needs to match up with the building contract. While you should have your lawyer review the contract before you sign, you should also have your bank review the house and land package contract before you sign (and then get your lawyer to review both documents to double check they match)

Banks often request amendments to building contracts, or may not stage the finance in the manner required by the building company – and once you’ve signed the contract, there is no way to back out.

Payment schedule

Your building contract will contain a schedule and method of payments to the builder based on various stages of the build e.g. foundations and floor, framing, roof on, closed in etc. These payments are often based on a percentage of the contract price rather than the value of the work.

You should provide your bank with a copy of the building contract and ensure that the Bank is willing to advance funds for payment of the staged payments as set out in your building contract. Your Bank may even require a valuation of the work. It may also be prudent to employ a competent building consultant to oversee the build and to inspect the site to determine whether the work in a particular stage is completed.

This is important because if the bank does not agree to advance funds to pay the staged payment and the staged payment is not paid or short paid, the builder can stop work onsite until the payment is made. There may also be penalty interest if you do not pay on time. If you do wish to dispute the payment claim, there will be strict timelines you need to adhere to.

Time to pay

The time frame for payment of these staged payments is generally 7 days. You should always make sure your builder emails you the all staged payment requests and any amendments or substitutions to the contract.

KiwiSaver

If you have a KiwiSaver account and it is your first home, you may be eligible to withdraw funds from your account to go towards payment of your house and land package.

You may also be eligible for an additional Kainga Ora First Home Grant – worth up to $20,000. Stringent property value and income caps apply to the First Home Grants that don’t apply when withdrawing your own KiwiSaver funds.

It is important to understand when KiwiSaver money can be used – can it be used to pay the deposit for instance? This will depend on the provider. You also need to know how long it takes for your provider to process applications and pay out the money and factor that into your payment plan.

Your lawyer should be able to advise you and help ensure the documentation matches up. It is easy to get caught short and unable to make a required payment if you don’t know for certain when the money will come through.

Delays

When considering finance for your land and build package, you need to understand the impact delays might have on your finance. Are you covering a mortgage for the home you are living in while you build? Or are you paying rent? How long could you sustain both sets of payments? Is there a time limit that your bank is imposing? Your building contract should include penalties for delays beyond a certain point.

Final Payments – Practical Completion or Code Compliance Certificate

Some building contracts require the final payment to be made on practical completion. Practical completion is when the works have been completed except for minor defects and minor omissions which do not prevent the works from being used for their intended purpose and which can be remedied in the defects period or at such other time agreed by the builder without causing unnecessary inconvenience to you. This does not include issue of the Code Compliance Certificate (CCC).

You should check with your Bank the requirement for the final payment as it is likely they will require the CCC to issue before releasing the last payment. We always recommend that the building contract is amended to include the issue of the CCC.

House and land packages can be a great way to buy a new home, but the key to stress free finance is ensuring that the house and land package contract includes safeguards for you and that your finance matches up with the payment schedule.

Remember too, that even the big building companies will accept negotiated changes to their standard contracts.

For further advice on house and land packages, contact experienced property expert, Jennifer Edwards, by phone on 09 837 6889 or email Jennifer.edwards@smithpartners.co.nz