Building a new home
A construction loan pays your builder in stages as the house goes up, instead of handing over the full amount on day one. I help people in Auckland and around New Zealand set these up, from a first home on a new section to a house-and-land package or a knockdown rebuild.
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With an existing house the bank lends against something that’s already there. With a build it’s lending against a house that doesn’t exist yet, so it pays out as the work is done. Each time your builder reaches a stage, such as the foundations, the frame, or the roof and windows, they send an invoice. The bank checks the work matches the contract and releases that payment.
You usually only pay interest on the money that’s been drawn so far, and many lenders let you pay interest only during the build. Once the house is finished and has its code compliance certificate, the loan moves to normal principal and interest repayments.
There are two common ways to buy a new build:
Progress payment contract. You own the land (or buy it first) and pay the builder in stages. This is the classic construction loan.
Turnkey contract. You pay a deposit when you sign and the balance when the finished house and land are handed over. It works more like buying an existing home, because the bank only settles once the house is complete.
New builds are exempt from the Reserve Bank’s loan-to-value restrictions. That covers building a new home, or buying one from the developer within six months of completion. It means banks aren’t rationing low-deposit lending on new builds the way they do for existing homes, so some will lend with a smaller deposit. New builds are also exempt from the Reserve Bank’s debt-to-income limits. See the Reserve Bank’s LVR page for the detail.
Being exempt doesn’t mean every bank will lend at a low deposit. Each lender still sets its own maximum and still has to be comfortable you can afford the repayments. If you’re a first home buyer, some participating lenders will also let you build with a Kāinga Ora First Home Loan, which needs a 5% deposit and has income caps.
A fixed-price building contract. Most lenders want a fixed price, not an estimate or a cost-plus arrangement, so they know the total won’t blow out.
Plans, specifications and a valuation. The bank orders a valuation of the finished home (an “as if complete” valuation) and lends against that figure.
Details on the builder. Lenders look at who’s building it. A builder registered with a completion guarantee, such as the ones offered through Registered Master Builders or Certified Builders, makes the application easier.
A buffer for the extras. Driveways, landscaping, fencing, curtains and council contributions often aren’t in the building contract. I always tell clients to have money set aside for them, because the bank won’t lend more once the budget is set.
Construction lending has more moving parts than a standard purchase, and the timing matters. I compare lenders on the things that actually cause problems in a build: how they handle progress payments, what they’ll accept from your builder, how long approvals last, and what happens if the build runs late. Then I stay involved through each drawdown so your builder gets paid on time.
Looking at a turnkey home from a group builder? See house and land packages. Renovating or extending instead? See renovation loans.
If you’re a developer building townhouses or subdividing, that’s a different kind of lending. Try the development finance pre-qualification tool first. For more on the process of building a home, read thinking of building your own home in NZ, and if you’re adding a minor dwelling, see building a granny flat in NZ.
It depends on the lender and your situation. Because new builds are exempt from the Reserve Bank’s LVR limits, some banks will lend with less than 20%, and first home buyers may be able to use a Kāinga Ora First Home Loan with 5%. Many lenders still want more, so it’s worth comparing.
Usually not. You pay interest on the amount drawn down so far, and it grows as each stage is paid. Many lenders let you pay interest only until the house is finished.
The bank normally lends against the agreed contract and valuation, so variations you add yourself generally have to be paid from your own funds. That’s why I suggest a fixed-price contract and a cash buffer.
Often, yes. With turnkey you pay a deposit up front and the rest at completion, so there are no stage payments to manage. The trade-off is less control over the design and the builder’s timing, and a long wait between signing and settlement.
Yes. Lenders treat bare land differently to a home and often want a bigger deposit for it. If you plan to build soon, it helps to have your building contract in place so the land and build can be financed together.