As New Zealand’s leading mortgage broker, Squirrel has engineered a new financial product called Squirrel HomeBuild that makes building a new home simpler, and without the traditional hassles associated with building.
Homeowners can now build without the hassle of having to make loan payments during construction.
For years, homebuyers have had to contend with financing an existing property or paying rent at the same time as making payments against their construction loan. With HomeBuild, no payments are required until the property is finished making loan servicing easier for the buyer.
Very briefly, the construction loan type that's most preferred by banks is the turn-key option. This essentially means you pay a small deposit up front and nothing until completion. The builder fronts the cost of the build and the risk of any cost overruns. The builder has to price this in and typically builders borrow at much higher rates than home owners, so it’s a hidden cost. A HomeBuild loan gives the homebuyer access to cheaper financing and a better build price.
The most common option for funding a build is a progress-payment loan. This means the end buyer enters into two contracts. One for the purchase of the land and one for the fixed price build. The buyer settles the land, and then starts the build.
During a progress-payment loan there are anywhere from 5 – 14 staged payments that occur at a given milestone. In this scenario, the buyer starts paying interest as soon as the land settles and the interest cost grows as the loan increases during the build. This is more than likely in addition to existing commitments like rent or mortgage payments and will often put stress on cashflow unless managed well. The benefit is that the builder doesn’t need to factor in their cost.
HomeBuild may reduce the cost of building. It is a hybrid of the traditional approaches to construction loans. For the builder, it gives them the benefit of progress payments. For the Buyer it gives them the benefit of not having to pay mortgage payments until the build is completed. Interest is capitalised into the loan facility during the build so that by the end of the build, the buyer is left with a loan which is the sum of the (land cost + build cost + capitalised interest).
It’s also available for loans up to 95% of the total cost – assuming you meet the lending criteria of course.
Buyers pay a $500 loan fee. That goes towards the additional processes we have for managing this type of loan. Squirrel has a small panel of bank lenders who we work with on this product along with a proprietary process designed to work alongside builders and make the process hassle-free. Unlike most construction loans, no interim or progress valuations are required.
Not all builders can work with Squirrel HomeBuild. The product doesn’t work in all situations. It requires good processes and reliable fixed price contracts with little or no provisional cost (PC) sums, and the registered valuation must equate to the total project price.
Right now, a buyer could find a house and land package in Huapai (near Auckland) for $790,000. This is made up of a land cost of $360,000 and a build cost of $430,000. Assuming the build takes 12 months from settlement of the land and that there are 12 equal stage payments (one per month) during the build:
Land Cost: $360,000
Build Cost: $430,000
Interest cost over 12 months: $33,000
Minimum deposit (5%): $41,150
Loan amount from Squirrel: $781,850
The Buyer settles on the land and puts in their deposit upfront. The initial loan is $320,500. The staged payments will then be $35,833 per month for 12 months until the build is finished. Rather than pay the interest throughout the build - which would start at $1600 a month and gradually increase to $3600 per month – the interest accrues inside the loan facility. This means the Buyer ends up with a total loan at the end of the build of $781,850 which is 95% of the end value. Of course, the Buyer may have a bigger deposit which is great and lowers the loan amount and accrued interest.