What is a Fixed Price Contract?
Fixed Price Contracts are the most common way we see people building new homes. The way these types of builds work is that you’ve found a piece of land, maybe a smaller section, maybe you subdivided, maybe you found a lifestyle block and then you’re getting a house designed and built for you on that piece of land.
The design could be done by an architect, drafts person, or quite common now is a building company that have already got plans that can be modified it for you or they have people who will draft up what you are wanting.
Once you have your plans sorted, your builder gives you a price to build that home for you. That price will have a whole lot of things that are included in the price and it might also have things that are excluded. Exclusions might be things like landscaping, lawns or maybe the driveway, curtains things like that.
When it comes to exclusions, you'll want to be careful with the fixed price build that you’re not having too many things excluded. The banks are very wary of exclusions as they don’t want you to get to the end of the build and still need $50,000 to finish off the build and have no way to fund that. So, you want to be careful with too many of those things excluded from the contract, but if you’ve got a contract with most things included, the banks are more likely to move forward with the finance approval.
Using a reputable builder and someone who belongs to organisations like Master Builders or similar is also really helpful when it comes time for the bank to accept the contract. These types of builders have good insurance policies that the banks like and Master Builders have guarantees in place about the build being finished even if the builder you start with can't complete the build and gives you confidence that they will stand by the build quality.
How do the banks fund Fixed Price Contracts?
When it comes to funding the build, the builder will want to be paid in stages. Often there is a bit of a time line to manage initially as the builder will want a deposit so that they can get the plans drawn up and consents in to council etc but the banks will want to see plans and consents sorted before they will allow you to access the lending. This is where using a deposit if you are buying your first home, or having proceeds from a sale handy, or at least having a facility to get the funds to pay the deposit is important. Assuming these costs are in the contract that the builder provides you, you can then get those funds back once the bank has accepted the consents, contracts and plans.
Then as you move on through the build and the excavation is done on the section there will be a payment. The builder will send you and an invoice and assuming it matches the payment schedule, the bank will supply the funds to to pay that invoice. Then when the foundation pad is put down, there will be another payment there. The frames goes up, the roof goes on and all of these different parts throughout the process and you get the funds to pay the builder.
As you take more lending your repayments start to increase. During the build process you will pay interest only on the lending at the floating interest rate and you’ll only pay it on what you actually already got so you don’t pay it on the entire amount, you only pay on what you’ve used. Once you get to the end of the build, when every thing is completed and you’ve got Code of Compliance that the bank is happy with, we can then work with you on the right lending structure for you and get you onto a fixed rate or however you'd like your lending structured.
Get some lending sorted!
So that’s a little bit about fixed priced builds, the most common way that we see construction lending. It's a really good way to get a house that you can design and get exactly how you want as long as there’s not too many variations or exclusions in the contract that the bank are going to be concerned about.
For all of your construction lending needs, the team at My Mortgage are here to help. Greg, Claire and Adam have all built houses of their own doing fixed price builds and can help walk you through the process of getting finance sorted for your build.