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What Banks Really Check When You Build A House · That Home Loan Hub

• 0:10
  SPEAKER_00: Hello and welcome back to that Homelon Hub.
• 0:12
  SPEAKER_00: I am joined by Kunch.
• 0:13
  SPEAKER_00: Hey Kunch! Let's build, let's build, let's build.
• 0:18
  SPEAKER_00: Housing under construction.
• 0:19
  SPEAKER_00: Today we're gonna talk about builds and if you're looking to build, what you need to be aware of and our point of view.
• 0:26
  SPEAKER_00: Yep.
• 0:27
  SPEAKER_00: Sounds cool.
• 0:28
  SPEAKER_00: Cool.
• 0:29
  SPEAKER_00: So we've got a couple of clients at the moment that are keen to build because they want they want to have new housing, you know, they want to have the latest installation and also you know, all the bells and whistles that come with the new build.
• 0:43
  SPEAKER_00: So um what do they need to be aware of?
• 0:47
  SPEAKER_01: As in home lending side of things, yeah.
• 0:51
  SPEAKER_01: So when you're building, there um the how the banks assess it, they assess obviously if you can um afford the loan, but also they assess the cost overruns as well.
• 1:04
  SPEAKER_01: So the cost overruns is what we call a contingency um plan.
• 1:10
  SPEAKER_01: So some builds may go over um the fixed price that you've actually signed up for.
• 1:18
  SPEAKER_01: So in terms of the assessment process, we just have to work out um the extra 10% at some or 5% at others as well.
• 1:29
  SPEAKER_00: Yeah, and there are different types of builds, right?
• 1:31
  SPEAKER_00: There are builds that come with uh, for instance, turnkey package where you pay 5% at the front, yeah, and then the rest at the end.
• 1:39
  SPEAKER_00: Yeah.
• 1:39
  SPEAKER_00: And this one is an interesting one.
• 1:40
  SPEAKER_00: A lot of clients don't realize, but we can actually obtain them 12 months approval.
• 1:44
  SPEAKER_00: Correct.
• 1:44
  SPEAKER_00: So if they get certain things ticked off up front, we can give them that peace of mind for 12 months.
• 1:50
  SPEAKER_00: So if the build is not going to be completed within three months or six months, they don't have to keep coming back to us for reapprovals.
• 1:57
  SPEAKER_00: We can give them 12 months and hopefully within that 12 months they get a build.
• 2:02
  SPEAKER_00: Hopefully.
• 2:02
  SPEAKER_00: But however, if it's not built within that 12 months, a whole new application will be required.
• 2:07
  SPEAKER_00: Yeah.
• 2:08
  SPEAKER_00: So something again that people don't realize.
• 2:10
  SPEAKER_00: And often in that 12 months, a lot can change.
• 2:13
  SPEAKER_00: They can go and have a baby or two.
• 2:16
  SPEAKER_00: Some people are incredibly talented.
• 2:18
  SPEAKER_01: Well, twins are involved in that, right?
• 2:20
  SPEAKER_01: Unless you have Irish twins in that 12-month period.
• 2:23
  SPEAKER_00: Exactly.
• 2:24
  SPEAKER_00: You know, a lot can happen.
• 2:25
  SPEAKER_00: So you gotta watch out for things like that.
• 2:27
  SPEAKER_00: Yes.
• 2:27
  SPEAKER_00: Um, cool.
• 2:28
  SPEAKER_00: So one turnkey, yeah.
• 2:30
  SPEAKER_00: 5% deposit at up front, 95% at the end.
• 2:33
  SPEAKER_00: Yes.
• 2:34
  SPEAKER_01: Then there is so in terms of turnkeys as well, we'll just um circle back to that.
• 2:39
  SPEAKER_01: So you need to get a registered valuation at the start and at the end as well in terms of turnkey.
• 2:47
  SPEAKER_01: The only thing is if the market changes um with turnkeys, you may if the registered valuation comes back lower than what your purchase price is in 12 months' time, you do need to find the funds to make the difference.
• 3:07
  SPEAKER_00: Otherwise, otherwise the birds are chirping.
• 3:14
  SPEAKER_01: I don't want to say it.
• 3:15
  SPEAKER_00: Yeah, otherwise the bank may not be happy, you may not get the approval.
• 3:19
  SPEAKER_00: So, what you need to do in that 12 months' time, during that 12 months, you need to keep saving.
• 3:25
  SPEAKER_00: You can't relax, yeah, baby, until that house is built.
• 3:28
  SPEAKER_01: Yeah, so in my time, I have witnessed um clients buying at the peak.
• 3:35
  SPEAKER_01: Um, so was it 2022, 23?
• 3:39
  SPEAKER_01: Property is completed 24.
• 3:42
  SPEAKER_01: However, it's come down, you know,$60,000 less than what that purchase price for.
• 3:48
  SPEAKER_01: Uh, fortunately, you know, most of the scenarios that I have seen, they've been able to make that difference up in terms of family members coming in to help in that sense.
• 3:59
  SPEAKER_01: Um, but hopefully that does not happen again because you know the house prices back then was an anomaly as well.
• 4:08
  SPEAKER_01: Um so people did overpay, overcapitalize in you know that 2021, 22 period.
• 4:16
  SPEAKER_01: So yeah, that's just another thing to be mindful when you are purchasing turnkey properties.
• 4:21
  SPEAKER_00: Um but the pros are, I guess, when you're renting, you don't want to be paying for the build, which brings me to my next point, where's the progressive type um repayment?
• 4:30
  SPEAKER_00: So you signed a fixed price contract and there are progressive payments.
• 4:34
  SPEAKER_00: So every time something happens, you make a payment.
• 4:37
  SPEAKER_00: So foundation down, you make a payment, roof is up, you make a payment, etc.
• 4:41
  SPEAKER_00: So the cost of that adds up because you'll have to pay your rent plus mortgage at the same time.
• 4:45
  SPEAKER_01: Yeah.
• 4:46
  SPEAKER_01: So that the so that kind of um loan is called a housing under construction, which is basically a house and land package.
• 4:54
  SPEAKER_01: Um, so you pay for the land first, uh, and then your second chance of the loan is um the construction part where you progressively draw down on that loan.
• 5:09
  SPEAKER_01: So the builder will invoice you, we send the invoice to the bank, they'll pay down um that invoice amount uh to the builder.
• 5:18
  SPEAKER_00: And usually that's the one we see the most off.
• 5:21
  SPEAKER_00: Because at the moment, not many developers want to take the risk for the turnkeys.
• 5:25
  SPEAKER_00: Usually they do their housing under construction.
• 5:28
  SPEAKER_00: And then the third option is usually um labor only.
• 5:31
  SPEAKER_00: So if you're a builder yourself and you want to build your own home because you've scored a really good deal on the land section because you're working so closely with the developer, etc., that's also an option.
• 5:40
  SPEAKER_01: However, there's a few hooks on that one on the labor-only side.
• 5:46
  SPEAKER_01: So at the moment you can borrow up to 90% on housing under construction and turnkeys, sometimes 95.
• 5:54
  SPEAKER_01: However, labor only is a little bit more restrictive in terms of um loan to value.
• 6:02
  SPEAKER_01: So at the moment, I've only seen 70% LVR in terms of labor only, but that's because when you're managing your own projects, there are a little bit more risks involved in terms of the cost overruns and things like that as well.
• 6:19
  SPEAKER_00: And also remember, guys, if you're building your own home, it means you're being taken away from your actual work.
• 6:25
  SPEAKER_00: So you can't be building your house and doing someone else's work at the same time.
• 6:30
  SPEAKER_00: So this is where the bank will be looking at you more closely, going, well, how are you going to make your money while you're building your own home?
• 6:37
  SPEAKER_00: So this is where having a buffer is very important.
• 6:40
  SPEAKER_00: So normally you wouldn't do that as your first project.
• 6:42
  SPEAKER_00: No.
• 6:42
  SPEAKER_00: Normally you would already have a couple of rental properties that bring in you investment income.
• 6:47
  SPEAKER_00: You'd probably have a partner that's working full-time.
• 6:50
  SPEAKER_00: So whether you're the female builder or you're the male builder, you know, the other person would be working full-time.
• 6:55
  SPEAKER_00: And you probably have very, very good budgeting skills.
• 6:58
  SPEAKER_01: Yep.
• 6:59
  SPEAKER_01: Yep.
• 6:59
  SPEAKER_01: So you need to provide a very in-depth like spreadsheet of what your costings are going to be to satisfy the lenders in terms of that.
• 7:12
  SPEAKER_01: You have to evidence your experience in that industry as well, like what have you done in the past, sort of thing.
• 7:18
  SPEAKER_01: Are you an actual licensed builder or is there a builder coming through?
• 7:22
  SPEAKER_01: However, with the changes in building consent and things like that, things are probably going to get passed off quickly as well, in terms of, you know, council signing off work and things like that.
• 7:36
  SPEAKER_01: So it it is a space that um to look out for.
• 7:39
  SPEAKER_00: Yeah, no, that's awesome.
• 7:40
  SPEAKER_00: Coinch, did we cover everything?
• 7:42
  SPEAKER_01: Oh, there's just so much when you, you know, think about turnkeys and housing and the constructions in terms of bill, but I guess in summary, uh it's exempt from RBNZ.
• 7:54
  SPEAKER_01: So the Reserve Bank actually exempts that.
• 7:56
  SPEAKER_01: So there's no loan-to-value LVR restrictions on that.
• 8:00
  SPEAKER_01: Um, so you don't need a massive deposit in terms of um purchasing a turnkey, and you can get approval quite um smoothly on that sense.
• 8:10
  SPEAKER_01: Uh registered valuation.
• 8:12
  SPEAKER_01: Um, so it we must get a registered valuation at the start and at finish, sometimes during the progressive work as well, in terms of um that side of things.
• 8:25
  SPEAKER_00: Yeah, exactly.
• 8:26
  SPEAKER_00: No, thank you so much.
• 8:27
  SPEAKER_00: And while you were talking, I just remembered another very crucial point when it comes to turnkeys.
• 8:32
  SPEAKER_00: If you're buying a property and a developer is throwing in a lovely gift for you, let's say a furniture package of$10,000, you know.
• 8:42
  SPEAKER_00: So you sign the deal today, you get a voucher.
• 8:45
  SPEAKER_00: Be careful because if that's built in into your sales and purchase agreement, certain banks have a policy to take away that$10,000 as the value of your house.
• 8:55
  SPEAKER_00: So let's say you're signing a contract for$750 and you got a voucher for$10,000 now, and you've got you know, 10% deposit only, whatever, the bank will not see the house value at$7.50.
• 9:09
  SPEAKER_00: They will see your house value at$7.40.
• 9:12
  SPEAKER_00: So that$10K voucher that you're getting is actually gonna hinder your application, then help you.
• 9:18
  SPEAKER_01: Well, you think about it, a voucher is essentially a um a gift of cash or something, right?
• 9:24
  SPEAKER_01: It's not actually the value of your house.
• 9:28
  SPEAKER_01: Yeah.
• 9:28
  SPEAKER_00: So but um apparently some banks are very, very, very strict on that.
• 9:32
  SPEAKER_00: So just watch out and check with us before you make any major decisions.
• 9:38
  SPEAKER_00: So thank you so much.
• 9:39
  SPEAKER_00: Stay tuned and check out any of our other previous episodes that might be relevant to you.
• 9:44
  SPEAKER_00: And don't forget to share, subscribe, and like us.
• 9:48
  SPEAKER_01: Thank you.
• 9:48
  SPEAKER_01: Bye.