If you’re planning to build a home, you’ll need to consider whether you will purchase a turn-key home or build your own. There are advantages and disadvantages to each approach – and different types of home loan – that you’ll need to weigh up.
So, what exactly are ‘turn-key’ homes? Often referred to as ‘house and land packages’, these are homes that are built on land owned by the developer. Though they can work out a little more expensive, they do make the building process very simple for purchasers.
The major advantage with turn-key homes is that the builder finances the build until it is complete and ready to hand over to the purchaser. The purchaser generally pays a small deposit to start the build and the remainder of the purchase price is paid when the build is complete. That means no ongoing mortgage payments while the house is under construction. Under the LVR (Loan to Value Ratio) rules for new turn-key homes, first-home buyers may be able to purchase a house and land package with as little as 5% deposit, and they can use their KiwiSaver first-home withdrawal or KiwiSaver HomeStart grant to make up part or all of the deposit.
Building your own home, on the other hand, means that you select the section of your choice and then employ a builder to construct a home on it. Overall, this approach generally works out to be a little cheaper and it does offer maximum flexibility, but the process is also a bit more complicated.
Finance for these types of builds is by way of a ‘construction loan’. You’ll need a minimum 10% deposit, for a start. You’ll then ‘draw down’ a portion of the mortgage to pay for the purchase of the land. This is generally an interest-only loan to begin with, but you’ll still need to factor in the interest payments. Then, when construction begins, you’ll draw down the remainder of the mortgage in parts so you’re able to make progress payments to your builder. This means you’ll need to make mortgage payments for the land and the build, on top of current living expenses (rent, etc.), until you’re able to move in.
A mortgage can be made up of more than one type of loan. For instance, you might have part of the loan fixed and the rest floating. It’s important to structure your loan correctly as this can mean a difference of thousands of dollars in repayments. Whether you are applying for a new mortgage or restructuring your existing loan, your mortgage adviser can provide valuable advice.