New Zealanders love to build new houses and while it can be exciting, it can be hard work too. Things don’t always go smoothly. So before you start making plans to build a new home, it’s good to first understand how you can have a newly built house and secure the right loan.

Financing the building of a new home is very different to arranging finance to buy an existing house. That’s why, in this week’s blog, we discuss the four differences between construction loans for new builds and home loans for existing houses. 

How are residential construction loans different with home loans for buying existing houses?

Video Timeline

Difference 1: Loan amount -- 00:34

Difference 2: Type of contract  -- 02:47

Difference 3: Builder’s qualifications -- 04:22

Difference 4: Registered valuation -- 04:47

Difference 1: Loan amount

When banks evaluate a construction loan, they will factor in how many bedrooms a house has. From the lender’s perspective, the number of bedrooms partly decides your rental income. So, in some cases, the amount you can borrow will be the same if you decide to build a new house or buy an existing home.

However, some New Zealand banks do have different construction lending policies. When they evaluate your construction loan, they will add 10% to the building costs stated in your building contract, even if it’s a fixed price contract. The reason for doing this is some people may want to upgrade the decorative materials in their kitchen or bathroom, for example, and these additional building costs aren’t included in the initial contract.

So, we highly recommend you engage a broker who specialised in construction loan early on and choose the bank that fits you best.

Difference 2: Type of contract

New Zealand banks tend to find it easy to approve a construction loan if the build contract is based on a turnkey package or a fixed price package.

A turnkey package is a popular option because the package is ready for you to “turn the key” and move in straight away. This package removes the stress of choosing a builder and managing all the project details yourself.

A fixed price package provides you with all the elements that are essential for living in a house. This contract may not include some of the smaller jobs like landscaping or your letterbox.

However, it may not be easy for a lender to approve your loan if you buy construction materials yourself and engage builders to build a new house. Once you need more money than you can afford, your lender will not approve your application. In this case, you may face the risk of not completing your building project.

Difference 3: Builder’s qualifications

There are two types of builder qualification: licenced builder and Master Builder.

Some home building companies, like G.J. Gardner, have built hundreds of homes across New Zealand. They are Master Builders and have a large team, guaranteeing the houses are built quickly and to a good quality.

Some New Zealand lenders only consider Master Builders, whilst other lenders are happy with licenced builders. So, engage a construction loan broker early on and choose the right bank.

Difference 4: Registered valuation

Some banks require a registered property valuation to determine the value of a newly built house. Based on the value, they can then calculate the LVR (loan-to-value ratio). However, you most likely won’t need a registered valuation if you buy an existing house.

Before building a house, some banks want to know the "As If Complete" value to give them an indication of the house’s worth once it is complete. Meanwhile, they also require the “As Is Complete” value, which helps them know the value of the house at different times of the building process.

Bear in mind though, New Zealand banks do have different lending policies on construction loans. For example, some banks won’t require a registered valuation if your new house is built by master builders.

Disclaimer: The content in this article are provided for general situation purpose only. To the extent that any such information, opinions, views and recommendations constitute advice, they do not take into account any person’s particular financial situation or goals and, accordingly, do not constitute personalised financial advice. We therefore recommend that you seek advice from your adviser before taking any action.

Prosperity Finance - here to help

Prosperity Finance understands all the complexities of construction finance. We manage your construction loans from beginning to end, and empower you to make the best long-term, informed decisions. As professional new-build mortgage brokers, we’re here to help. Whether you’re ready to start building or you’re still planning your new home, give us a call today on 09 930 8999.

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