June 2, 2016

Congratulations – you’ve bought your block at Watagan Park

An exciting journey awaits as you prepare to build and move into your dream home. But what happens next? We explore some of the money and budget-related steps to consider…

Budgeting for a construction loan

After your purchase settles, it’s time for your mortgage broker to arrange a construction loan. Work with them closely to set a realistic budget that covers everything needed for you to comfortably move into your new home including items such as blinds, floor coverings, turf and fences. If you have a large deposit saved, a good strategy may be to save some of that cash for the end of the process, and use it to pay for items not covered in your building contract.

Home inclusions budget

Home inclusions significantly affect your budget. Even small changes to surfaces or materials can cost thousands of dollars, so it’s important to stay true to your original goals and priorities. If you’ve fallen in love with a new idea, consider the impact this may have on affordability and whether it may compromise other aspects of your home. It may not be worth the costs in the long run. Like most things in life, it’s a good idea to have a little extra money available when building a new home. There are nearly always unexpected things that pop up. You will be thankful in the long run if you’re able to cover these odds and ends. Once you’ve decided on inclusions, it’s time to start speaking with builders.

Builder deposit

Most builders require a deposit or ‘tender acceptance fee’ of between $1000 and $3000 to draw up documents, discuss specifications and establish all the information they need to draw up the building contract. The final building contract gives you the overall construction price. This is the most important number, so make sure it lies within your original budget.

Arranging the construction loan

Ask your mortgage broker to arrange a valuation for your planned home, based on the building contract. This helps you to determine whether you can service the loan, and ensures the builder’s price is within market range. Once valuation is approved, your lender confirms they will lend you the funds against the signed building contract. Get the building contract checked by your solicitor before you sign it. This ensures that you won’t be disadvantaged by small print that you may otherwise overlook such as wet weather clauses or penalty payments if construction runs over time.

Starting construction

After your solicitor and mortgage broker complete these steps, you can sign the building contract and take it to your mortgage broker. Before construction starts, your builder needs to see evidence of the funds required for completion. This can take two forms:

  • An authority to commence construction (letter from your bank)
  • A term deposit joint account, opened with the builder, that requires both signatures to move any funds. This is the most common option, as most people don’t have large amounts of money available to fund construction. The interest that accrues within this account is your responsibility.

Once this happens, your builder is able to start!

Where will you live?

For most people, there are three options available while their new home is taking shape:

  • Stay with friends or family

It makes sense to do this early in the process, to maximise your savings. If you have an existing home to sell, you can use the proceeds to pay as much as possible off your land mortgage to minimise your interest payments.

  • Rent close to your land

This is a good way to keep track of the construction. By living nearby, you can immerse yourself in the local lifestyle and establish connections with local facilities. If necessary, you can also start finding employment close by. However, once you’ve bought land, you start paying interest on your land mortgage, and this can be challenging if you are also paying rent.

  • Build before selling your current home

If you own your current home and your financial situation allows, it may be an option to move only once, purchase the land, fund construction as well as your existing mortgage, move into your new home, then sell your old home. This poses the biggest risk because you don’t know what your existing home may sell for, and the market may change.

Building progress payments

During construction of your new home, your builder issues progress invoices in accordance with the building contract. This is usually upon completion of five stages – the slab, frame, fit out, lockup and finishings. The first progress payment is usually around 15 per cent of the total amount. The lender usually inspects the work before releasing funds for each stage. They do not inspect the quality of construction work – only its completion. Each time funds are released, your monthly repayments and interest increase in line with the total amount owing.

Last invoice and handover

The last invoice is payable at the final inspection. It’s important to make sure you’re 100 per cent happy with all construction work before handing over this cheque. Once it is paid, the building contract is complete and the builder has no more obligation to you (unless you start a warranty claim). Ask your mortgage broker to arrange a bank cheque for the outstanding amount, and bring this to the final inspection. This way, you receive the keys straight away. It’s much more exciting than paying electronically, where funds take days to clear and keys are posted.

Ongoing relationship

Stay in touch with your mortgage broker. It’s a good idea to update them on your situation at least once a year, and get a free mortgage health check to assess whether funding arrangements are still optimal for your needs. A quick phone call could save you many thousands of dollars. As financial markets and your financial circumstances change over the years, you may become eligible for better funding arrangements, such as lower interest rates and more flexible repayment terms. As you establish equity and a mortgage repayment history, you may also become eligible for more competitive loans with other lenders. Your mortgage broker can guide you on refinancing options, and through that refinancing you may open a door to your next purchase – an investment property or your next home.

Tip

Ask your mortgage broker to calculate whether you can afford to add a little extra to your repayments. By reducing your interest, you can pay off the loan more quickly – even a little extra can slice years off your mortgage.

Live outside the box at Watagan Park

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