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Construction Loan

Definition: A loan used for construction of a residential house on vacant land or to make structural renovations to an existing property.

Many people dream of building their own home with a design that suits their family situation and desired lifestyle, but while building a home can be fun and give you a sense of achievement it can also be stressful and end up being more expensive than budgeted if you are not very careful.

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Use this calculator as a guide to find out what your home loan repayments could be.

Key terminology that you’ll need to know if you’re building.

01.

Progress payments

A progress payment is a loan where payments are made progressively at stages when required.  A schedule of payments is usually set for each stage of the construction, e.g. foundations, roof on, fully enclosed etc.

Quantity surveyor

A quantity surveyor is an expert in costing the individual sub contractors that form the completed dwelling. Construction under full supervision by a Quantity Surveyor is another option to that of a builder offering fixed price contract. The applicants will need a Quantity Surveyor to supply all of the sub contracts and costings. The project should be fully controlled and managed by the quantity surveyor until fully completed.

02.

Fixed price contract (non-escalation clause)

This is where a builder takes ownership/supervision of the whole project.  The builder costs the whole job and specifies every item down to its cost and type.  He legally commits himself to the contract price.  The builder sources building materials, does the carpentry, pays the suppliers, employs the sub contractors such as drain-layers, bricklayers, plumbers, electricians, painters, wall paperers, carpet layers etc.  It is the builder’s responsibility to manage and pay the sub contractors within the Fixed Price quoted in the contract.  (any cost over runs will be paid for by the builder).

03.

Labour only or “contracting out”

Labour only contract is where a prospective borrower wishes to manage the project themselves.  With this type of contract it is vital that every single aspect of the project has been covered and costed correctly.  The prospective borrower will employ the builder and all the sub-contractors on a labour only basis and source the materials to be used by sub contractors themselves.  They pay on a piece meal basis for materials and services rendered by suppliers and tradesmen.  Sometimes they can save in costs but if they are not careful a lack of co-ordination could lead to an under-estimate of the cost of the project resulting in cost over-runs and a blow-out of the LVR the bank has approved on.

04.

Building consent

Also known as a permit.  Consents are issued by the local Council in the locality of where the house is being built.  Plans and specifications are submitted to the local Council who approve the method of construction, the materials of the proposed dwelling, that building codes are being adhered to.  They ensure that all other government building regulatory requirements are being met (Resource Management Act to name one).  Building inspectors visit the project at certain intervals to ensure that the various building codes and specifications are being adhered to (i.e. they will inspect the property before internal linings are stared to ensure internal electrical wiring is up to standard).  Building consent is required before any new home can be started or any alternation to existing dwellings can be undertaken.

05.

Builders risk insurance

This type of insurance is a cover against civil claims (say public liability) as a result of damage done.  It covers materials from fire, theft and water damage.  It can also cover against a digger damaging power supplies, telephone cables, drainage etc.  Most Lenders will require the policy held to note them as an interested party on the insurance.

House insurance

You’ll need to have insurance in place while construction is taking place. For renovations ensure the house insurance is noted and covered for the renovation risk.

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