Factors to consider when building property from scratch

If you are fortunate enough to own a piece of land in an urban area or prefer to buy a stand and build the house of your dreams from scratch, there are a few important factors to consider when applying for a building loan from your lender.

Marius Marais, chief executive of FNB Home Loans, says although the process of securing building finance differs slightly from a traditional home loan, it is still governed by the National Credit Act and the same banking policies and lending criteria do apply.

“When applying, you will need to use one of the channels available and ensure you have the following documents:

  • A quotation from a builder who is registered with the National Home Builders Registration Council (NHBRC).
  • Building plans and a supporting schedule of finishes.
  • A contract between yourself and the builder.

Furthermore, a minimum 10% deposit which takes into consideration the value of the land and in addition a contract amount may be required upfront.

“Once the building loan application has been approved, the land transferred into your name and the  bond registered, there a few important factors that you need to take note of,” explains Marais.

  • The loan will be offered in stages, through progress payments, until the building has been completed. The facility will then be converted to a normal 20 year home loan.
  • Building must commence within three months after registration of the bond and completed within 12 months, to avoid penalties.
  • The building contractor should be insured for unforeseen events through contractors all risk insurance cover for the duration of the project. The onus falls on you to take out home owner’s cover once the building has been completed.
  • The builder must enrol the project with the NHBRC which provides a five year warranty over structural defects, from the date of occupation
  • It is your responsibility to ensure that the builder understands and complies with all the bank’s conditions of the loan.
  • Before any progress payments are paid out by the bank, a valuer should inspect the building progress and report back to the bank.
  • You can apply for progress payments at any stage during the construction process provided that sufficient work has been completed and the bank is satisfied with the progress. A maximum of six progress payments are often allowed, based on the work completed. Additional progress payments will attract a fee.
  • You need to pay interest on the drawn building loan balance until the project is completed, with normal interest payable thereafter.
  • Once the building work has been completed, you need to confirm that you are satisfied and at this point you could provide a list of snags to be fixed. It is important that this is communicated to the builder and the bank.
  • A retention amount may be withheld in order to ensure that the builder completes the outstanding work.

“It is advisable to consult an attorney before signing any agreements with the builder, as these can potentially work against you in future,” says Marais.

“Should you decide to change the building contractor or make any drastic changes to the original plan, you need to inform your bank. The bank may re-assess the facility and either approve or disapprove the request, based on how it affects the overall building costs and market value of the property,” concludes Marais.