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Building & Renovation Lending Frequently Asked Questions - Construction Lending Part 6

Do I pay rent while I build?

If you’re building a house and you’re not living in it while you’re building, you will need to be paying rent or your previous mortgage while that house is being built in a fixed price contract. However, one while you're building the home, you’ll only be paying interest on the amount of lending you have, not the principal and normally with the fixed price contract you’ll be accessing funds a little bit at a time throughout the build. So initially you may have a very small home loan for that lending for the construction and then as you get further along the process it will b a larger amount but it will still only be interest only. 

One thing to know is that it will be on a floating interest rate. A construction loan can’t be fixed while you’re drawing down on it.

Yes, you will need to be paying rent or your current mortgage while you build but there are some considerations as it will be less than the entire mortgage in the end.

Can I use friends & family who are tradies to do me a deal?

So you’ve got friends and family who are traders and they’re gonna help you build your house and do it in a cheaper rate, that’s great. There are ways that you can do that, we just need to be careful how that’s approached. So the easiest thing is talk to your builder about a if they can get the cost of that particular thing from your friends and family. For example, you’ve got a brother who’s an electrician, talk to your builder about getting him to use your brother to do the electrical work for the property, your brother gives him a price and then it’s all part of that fixed price contract that the builder is giving you. 

If it’s the entire build because you have a family or friend who owns a building company it may be little bit more complex. The initial quote and contract will need to be for the entire amount like a normal build because the banks are going to question why a builder can build something so cheap otherwise. The bank needs to be certain that the build can be completely finished for the price you are contracted to pay. Then, when you get to the end of the build, your friends and family can apply discounts and the final amount can be less than was contracted.

Can I use KiwiSaver & the First Home Grant as a deposit to build?

We are very lucky that in New Zealand we have KiwiSaver, that has been running since 2007. Lots of people have very good deposit for property purchases and, yes, you can use your KiwiSaver as a deposit when you build a house. That’s a great starting point for getting a deposit and also you can use the First Home Grant. If you’ve been contributing to KiwiSaver for more than 3 years and you are building for less than the regional price caps and you fit the a few other lending criteria, you can get up to $10,000 per borrower to go towards a build from the First Home Grant. That’s really a good incentive to look at building as an option. There is some really good reasons to use your KiwiSaver and the First Home Grant to build a property as your first home.

Do you have to have a 20% deposit to build a new home?

Historically, yes, it has been a little bit easier to fund builds when you have less than a 20% deposit and the reason for that was up until April 2020, there was what’s called LVR restrictions, Loan to Value Ratio Restrictions, which made the banks limited how much they could lend if you didn’t have a 20% deposit. However those has been removed. So now it doesn’t really make a difference whether you are buying an existing or building, the banks don’t have the same restrictions on them in terms on what they are allowed to lend. 

However, you still need to meet the same criteria if you don’t have a 20% deposit so making sure you’ve got low existing debt, making sure you’ve got the right amount of income to finance that debt, and then thirdly, making sure you’ve got good account conduct and character. That means you’re making any repayments on time on existing debt that you might have and not using overdrafts incorrectly. Yes, you can get lending for building if you don’t have a 20% deposit, most of the time those of the house and land packages and turn key builds because those are more fixed prices rather than some other types of lending that can have some variations in them.

Do I pay Principal and Interest while I'm building?

With most types of construction lending, you don’t need to pay both principal and interest while you’re going through the build. What the banks do, because you're drawing down on the loan throughout the whole build, you only pay interest on that lending as you go and you pay the floating interest rate which is normally slightly higher than the fixed rate. You'll want to do your numbers based on an interest only loan and using that floating rate. 

You can use the My Mortgage Interest only calculator to help explain what you will be paying at each step of the build.

When we get to the end of your build and you get your code of compliance and the house is completely finished, at that point you can refix your mortgage, get it on a fixed interest rate within the structure you are wanting to use.


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