Unless you have the cash saved up, constructing a home is going to require getting a loan from a financial institution called a building loan. Essentially, a building loan can be used to finance the construction of a home, additions to an existing property or renovations.
Once an applicant has been approved for finance, the loan lump sum amount is not paid to the applicant but is rather managed by the bank and paid to a building contractor based on progress of the construction. The progress of the construction will be assessed by an assessor from the bank who will determine a percentage of the loan to be paid to the contractor at any given stage of construction.
The bank will not charge interest on the unused portion of the loan. However, interim interest will accrue on the money that has been paid out. Applicants will need to make provision to pay the interest charged, to avoid a shortfall when the final pay-out of the loan is made.
When it comes to building or renovating a home, there are nearly always unforeseen costs which rear their ugly heads, it is therefore important to prepare for these in advance. Several aspects could have an impact on the cost of the project such as delays in the schedule caused by weather or labour strikes. It is not uncommon for a project to cost an additional 20% more than the original estimated cost of building the home. Much like saving for a deposit to purchase an existing home, those who decide to build will need to have some cash set aside. It is also important to bear in mind that there with be an initiation fee and other costs charged on the loan itself.
When applying for a building loan, applicants will be required to provide the mortgage bank with the following additional documentation:
- a copy of the Offer to Purchase of the stand or is the property is already registered in the name of the owner, a copy of the title deed
- a signed building contract between the purchaser/owner and the builder which should include a schedule of planning and finishing dates, specifications regarding materials and finishes. It should be noted that many banks offer their clients a standard building contract which complies to the bank’s requirements and which may be used
- building plans approved by the relevant local authority for the home. The bank’s assessor will base his/her estimated value on the plans
- a copy of the builder’s National Home Builders Registration Council (“NHBRC”) certificate
- a written waiver of the Builder’s Lien, which is the right the contractor has to retain the keys until full payment of the contract is received. The bank becomes the preferred creditor if this right is waived.
- In certain instances the bank may impose additional special conditions which they require adherence to, such as commencing or finishing the project within a certain time frame or appointing a civil engineer to oversee construction of floor slabs or the roof.
Lastly, a few words of caution/advice:
- Building a new home or even adding to an existing home is a time-consuming and mentally taxing exercise
- It is currently much more expensive to build compared to purchasing an existing home
- The bank assessor’s inspections of the project (if the project is financed) does not necessarily ensure that quality work is done or that the correct specified building materials were used. Banks ensure that they are specifically indemnified against claims in the event of faulty construction or bad workmanship
- Consider appointing a Quantity Surveyor or an experienced project manager to manage the project specifically to ensure that construction is done in terms of approved building plans, correct building materials are used, correct construction methods are followed and that only the amount due to the builder is paid and not a cent more.