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Construction funding 101 !

Construction funding 101 !

May 28, 2023

Construction funding for your project can be a tricky process with banks, there are different types of contracts available, and each contract has its own policy requirements.

At Benchmark we have years of experience in dealing with various construction projects from helping clients design their dream homes, build multiple investment properties, or helping them build their perfect holiday home.

At Benchmark we are here to help you navigate any hurdles and make the whole process of securing construction funding easier with banks or other lenders.

The first key takeout for construction finance is they have been exempted from RBNZ (Reserve Bank of NZ) rules. This exemption means you don’t need to have a 20% deposit on a newly built property which will be your owner-occupied property and a 40% deposit for investment properties.

Depending on the contract you have agreed with your builders this will determine how low your deposit will be, this is one of the reasons choosing the right contract is crucial when seeking funding with banks or other lenders.

Turnkey Contract
- Turnkey contract is a fixed-price contract between you and the builder
- One of the key advantages of a turnkey contract is costs should not blow out once a project has started
- Full payment of the contract is made at the end of the build-on settlement after the property receives its code of compliance
- There are no scheduled invoices during the build which means the loan is not drawn and there are no repayments or interest during the build phase
- In a turnkey contract most banks for owner-occupied properties accept a 10% deposit and in some cases 5% (case by case) and for investment properties it is 20%

Land and Build Contract
- Relatively similar to a turnkey contract, the only key differences are you will be settling on the land first and then the building work will start.
- Unlike a turnkey contract payment to builders will be done on progressive schedules through the build, which means repayments on your loan and interest will be charged from the on-set
- Similar to turnkey contracts RBNZ exemption applies and the deposit amounts are case by case with each financial lender and their given policies at the present time, this is something we can discuss with you in detail and go through the options of each lender.

Cost and Quotes/Partial Contract
- Lenders in most cases see Partial Contracts as higher risk compared to the other two contracts, this is due to many variables involved and fluctuations in price. It is suited to clients who are relatively experienced in the construction industry and have had experience dealing with sub-contractors.
- There are more conditions put by lenders on these types of contracts and this is all required up-front
- Progressive drawdowns are made against invoices similar to land and build contracts, but some lenders will request valuations for each drawdown stage to ensure there are no blowouts.
- If you are considering this type of contract, clients need to strongly consider the cost overruns of the project and plan a detailed budget for the whole project.

DISCLAIMER: The information contained in this blog is general in nature. We cannot assess anything about your personal circumstances, your finances, or your goals and objectives, all of which are unique to you. Before making financial decisions, we highly recommend you seek professional advice from someone who is authorized to provide financial advice.

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