Home loans, construction loans and line of credit loans are similar in some ways and vastly different in others. Before you decide how you want to finance your new build, it’s important to understand the key differences between them.
Important note: The information provided in this blog should not be a substitute for financial advice. You should always consult with a professional finance advisor before making any investment decisions.
Home construction loans vs normal home loans
It’s not all upfront
Unlike a normal home loan, a lender usually releases a home construction loan in stages as your new build progresses. As each stage is complete, your builder will invoice you, which is then forwarded to your lender who will release the funds to pay them.
Exempt from LVR restrictions
While there are tight LVR restrictions on purchasing existing property, this does not apply to new construction loans. Some have deposit requirements as low as 5 per cent.
Extended pre-approval periods
This may vary between three to 12 months. If you’re not purchasing a land and house package, it can give you time to find a section you like.
Most are variable-rate loans
Some fixed-rate loans are available, but they are less common.
Interest-only payments during construction
This helps to reduce outgoing costs and is usually on a variable interest rate.
No repayments required for 12 months
This is a common feature in many construction loans. Your payments to the loan principle are delayed and the interest you accrue is added to the loan. Again, this helps to manage outgoing costs and is particularly useful if you’re still paying mortgage or rent on your current home.
Recommended reading: Top 20 FAQs on building a new house and Hamilton City Council Building Consent.
3 types of home construction loans
Turn key
This loan is available for fully managed builds that see all aspects of the new property completed—from the house to the landscaping and fencing. They typically require a 10 per cent deposit on purchase and settlement on completion.
Build only
As its name suggests, this loan covers the construction of the house only. A 20 per cent deposit is usually required.
Partial contract
This loan is usually for self-managed builds that involve a variety of contractors/sub-contractors. It is mainly used on homes that are being relocated, are prefabricated or kitset homes. It usually requires a 35 per cent deposit.
Line of credit loans
While a normal home loan works like a lump sum payment, a line of credit loan behaves like a credit card. The “loan” you take out is more akin to a credit limit. It is a flexible loan that allows you to access funds when and as you need them.
Pros:
- More flexible—you can withdraw funds in stages to make lump sum payments.
- Interest is only charged on the funds you’ve used, not on your overall limit.
Considerations:
- Usually interest-only loans.
- Interest rates are often higher.
A note about equity
If you plan to set up a line of credit loan using your current home’s equity in place of a deposit, it’s a good idea to have your home formally valued to determine how much equity you have in it. This will directly inform the banks on how much you can borrow, and is particularly important if your home’s value is likely to have increased since you purchased the property.
How much can I borrow to buy land?
It depends on where you buy. If you purchase an empty section within 50km of the city boundary, it is usually 80 per cent of the land’s value. However, the property must meet certain criteria: you have to built on it within 5 years and the site must be accessible and have its services connected.
If you’re looking to buy land for a lifestyle property, borrowing can vary between 50 to 80 per cent of the land’s value. Again, where the land is located will determine how much you can borrow.
Can I borrow while I still have a mortgage?
Absolutely. This is very common. Many homeowners who choose to build often opt for a construction loan, which has additional features to help you avoid the financial stress of servicing two loans at once.
Read more: Should I sell my house first or buy first?
Can I use KiwiSaver to help fund my new build?
Only if you are first home buyer/builder. If you are, you can read more about the KiwiSaver HomeStart grant here.
Thinking about building new?
Check out our free guide on new build pitfalls to avoid so your next home goes up without a hitch!
