Are you fortunate enough to own a piece of land in an urban area or do you want to buy a stand to build the house of your dreams from scratch?
Then here are a few important things to consider when applying for a building loan from your bank, courtesy of FNB Home Loans CEO Marius Marais.
Though the process of securing building finance differs slightly from a traditional home loan, it is still governed by the national credit act, says Marais.
Therefore, the same banking policies and lending criteria still apply.
Ensure you have the following documents when applying:
1. A quotation from a builder who is registered with the National Home Builders Registration Council (NHBRC)
2. Building plans and a supporting schedule of finishes
3. A contract between the builder and yourself
A minimum 10 percent deposit – land value and building costs – may also 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 you must 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.
• The 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. It is your responsibility 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 also your responsibility to ensure the builder understands and complies with all the bank’s loan conditions.
• Prior to any progress payments being 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 of construction – provided sufficient work has been completed and the bank is satisfied with the progress. A maximum of six progress payments is often allowed, based on the work completed. Additional progress payments will attract a fee.
• You must pay interest on the drawn building loan balance until the project is completed, with normal interest payable thereafter.
• Once construction is complete, you must confirm you are satisfied. At this point, you can provide a list of snags to be fixed. It is important this is communicated to both the builder and the bank.
• A retention amount may be withheld to ensure 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.
“Should you decide to change the building contractor or make any drastic changes to the original plan, you need to inform your bank,” says Marais.
“The bank may re-assess the facility and either approve or disapprove the request, based on how it impacts the overall building costs and market value of the property.”