With Auckland still in the midst of a housing shortage, a number of prospective buyers are now looking to buy a plot of land and build their home from scratch. While this is an excellent idea, especially with a number of developments popping up all around the cities outskirts, it does bring its own challenges, particularly around how to finance the built.
If this is an attractive and obtainable option for you, here are a few things that you need to be aware of before you break ground.
Understanding the different loan types
Typically there are two main types of loans that are available for those looking into this option: construction and turn-key.
Firstly, construction and land loans, which is the traditional way to fund these housing projects, generally involves gaining two loans from your lender. The first, being a loan to purchase the land, which is approved before the build. Secondly, approval for a loan to fund the construction of the building. Once you have approval for the second loan, the loan you received to purchase the land will be added onto your loan for the house.
Most lenders that offer this option, will require you to start the construction of your house within two years of gaining approval. However, this does not mean, you must complete the build, you simply must start. Payment of this loan will occur in stages at prearrange intervals throughout the build with the final payment coming upon completion.
Secondly, a turn-key loan, which is when you purchase a land and house package from a developer and pay an initial deposit before construction starts and pay the rest once construction has finished. This is a newer option, that has come about due to the rapid increase in housing developments across the country.
Consider every financial possibility
It’s important to note that buying land and then building on it can present a number of different costs that many people don’t consider.
One of the major ones is the fact that building a house can take several months, thus, requiring you to continue renting until completion. In this situation, you may find yourself having to fund mortgage repayments on the build before you even move in. To avoid this issue becoming a major burden, make sure you are fully aware of the financial commitment you are getting yourself into before you start.
Another aspect you need to consider is who will be responsible for paying the contractors throughout the construction. Ideally, your lender will be able to pay the contractor directly, however, some may require the funds to come through you. So make sure you have a clear understanding of the payment process.
Do you have insurance?
If you are purchasing land and building a house, we highly recommend organising some form of insurance during the build. In some circumstances, the developer or builders will be able to provide insurance themselves, however, others may not.
Before any work starts, or even before you sign a contract, make sure you are aware of who is responsible for insurance. Don’t be afraid to ask your builder if they have insurance and with what institution. If they do, great, that is a cost you don’t have to account for. However, if they don’t you will need to factor this in and find an insurance provider that will cover the process.
Get a helping hand
If you are intending on building your first home, don’t forget that there are schemes available to help you fund the build. Both KiwiSaver and the Home Start Grant are viable options that can help you secure the land and house package you desire.
Make sure you do your research and talk to our trusted advisers to understand exactly what is available and if you are eligible.
All around the Auckland region, there are housing developments popping up like crazy, and there are more in the pipeline. For people who are looking to purchase their first home, buying a piece of land and building a house, is a wonderful option.
If you are interested in pursuing this avenue or would like advice about alternative ways onto the property market, get in touch today and we will help you get onto the property market.
