Building Costs, Finance & The Building Process
Financing the building of a new home it is very different to arranging finance to buy an existing one, so it’s really important that you work with someone who understands all the complexities of building finance.
These days, the least expensive rule of thumb costing for building work is around $1500 per square metre, $2500 per metre for more upmarket versions and upwards for luxury.
Allow at least 10% for overruns, unforeseen costs or changes to the plan - you are likely to need it (and if you don't need it then you can have a great housewarming party)!
The best time to work out your finance is when you first start thinking that building may be an option for you. Talk to a mortgage broker who is a member of the New Zealand Mortgage Brokers Association (NZMBA), or if you’re happy that your bank has the best building finance available, you may like to talk to them.
List of the most popular lending options
- Borrow up to 95% of the house and land value
- Don’t make any loan payments until you move in
- Borrow extra funds for furnishings and finishing touches
- Pay interest only on the amount of money you have drawn down to pay the builder, at any time
And this is just the start of it!
Knowing how much you can borrow will help you when talking with builders, and looking at different plans. Having your loan already approved means you know exactly how much you can spend on the house and all those extras (like carpet, driveways, fencing etc).
Arrange finance to purchase a section and have pre- approved finance in place to build the home. Remember to allow for lighting, carpets, curtains, driveway, paths, decks, grass and fencing and other landscaping items
- Buy the section
- Decide on suitable plans with your builder/architect
- Get a valuation, using the house plans and building specifications you have chosen for your new home. This is where an independent property valuer reports to the lender on what the property will be worth once complete. To do this they look at your plans, specifications and your vacant section
- Take a copy of your building contract to your lawyer
- Once you are happy with the building contract arrange for a copy of this to be taken to your finance professional so finance can be confirmed
- The building contract is normally confirmed at this point with a deposit paid to your builder. If you do not have the available funds to meet this then speak with your finance professional for guidance
- Progress payments commence
- Nearing completion of your new home you will be advised of a handover date. It’s really important you advise your finance professional of this date as early as you possibly can. The handover date is where you get the keys to your house in return for final payment. For the lender/bank to release these final monies they will need:
- A copy of your house insurance starting from the date of handover. Your insurance must include your lender as an interested party
- A completion certificate, provided by the valuer, so the bank knows the house is fully completed
- A Code Compliance Certificate, which is issued by the local council. Your builder would normally arrange this once all work is complete
What Can You Afford?
- Building is an expensive exercise: plan, plan, and then put aside a little more time to plan. This will help your budgeting.
- Budgeting is not a vague hope – it should be an accurate and specific target by which to stick with as much as possible. The building process itself is stressful enough on you and your partner and your suppliers, without having the added strain of financial difficulties.
- Why not investigate your alternatives to building beforehand – for instance, will it be better and more financially viable to sell and move to a home that will give you what you want?
- Everyone wants a million dollar home but there are few of us who can have enough money, so the name of the game is compromise. Make sure you give yourself a budget you can afford and try to stick to it in spite of all the temptations.
- Avoid change to designs and materials if you can – changes cost money, not least because the tradespeople can deviate from their quote when you deviate from your brief. ( See our Budget Worksheet ).
- These days, the least expensive rule of thumb costing for building work is around $1500 per square metre, $2500 per metre for more upmarket versions and upwards for luxury. And allow at least 10% for overruns, unforeseen costs or changes to the plan – you are likely to need it (and if you don’t need it then you can have a great housewarming party)!
Working Out the Estimated Cost
- If you have the time and you’re that way inclined, you can get an idea of the cost of the different materials you think you’d like to use – the cladding, the roofing, the joinery, the fittings, appliances, etc…
- This is information you’re going to need eventually anyway, so now is an ideal time to do it. Otherwise you can just rely on your architect or builder to steer you in the right direction – but be aware that they’re not always right and the items they suggest may be wonderful but may not fit your budget.
- Talk to your architect/designer about what you’d like in the way of design and material and get their ballpark figures. Remember, it’s easy to change your mind at this stage – not when the roof is about to go on and you’ve just realised that by building this way you won’t be able to afford to finish!
- Decide what’s important to you to keep and what you’re willing to give away. And make sure you and your partner keep discussing these aspects and that all sides compromise.
- This is where a Quantity Surveyor can help you really nail down the costs. They will go through every aspect of the job and give accurate costings (though not necessarily exact, as specifications change during building).
The Department of Building and Housing has a rough guide to the costs of building here...
Renovation and Alteration Costs
When the job is a renovation, other factors come into account. Do you want to match the style and materials already used in the house or are you comfortable to add something that is different (but still, ideally, complementary)? Is it time to change elements in the old house, for instance wooden to aluminium joinery or do you really want to match light fittings and bathroomware to the old style prevalent in the house or should you modernise?
And remember, with renovations, there are often hidden problems that only come to light when the wall boards come off. Be prepared for nasty surprises and make sure you have contingency in your budget.
See our Renovations Page here...
Paying For It!
For most people, borrowing against the current value of the house to do an extension, or borrowing against the final value of the finished house if building new, is the usual way of financing a building project.
So, the first thing you will need is a valuation before you speak to a bank or mortgage lender. On the other hand, letting the financial institution know how much you’re looking to spend may save you the time and money of getting the valuation if your financial situation is tenuous.
When you’re building the funds are advanced by progress payments to your builder. This ensures that you are only paying for work the builder has done at anytime. It’s really important that you never owe more than the house is worth at each stage of building.
Normally when a builder invoices a progress payment, the bank will want to see an updated progress report from the valuer. This report is generally a one page and will tell the bank what the property is currently worth and what the cost is to complete. The bank will then pay the funds out to you at which time you would write out a cheque to your builder.
Contract Works Insurance
Arranging the insurance for the construction of your new home is an essential part of the planning of the project. Without appropriate cover being in place you risk everything – would you really want to risk your dream home going up in smoke and not being able to afford to rebuild it?
For more information about mortgages see ConsumerNZ. Some of this information is free, but for some you will need to subscribe to get specific information.
Third Party Builders Guarantees
Building a new home is probably the biggest investment you’ll ever make, and if anything goes wrong it could be the most costly too. It makes sense to reduce your risk by having an independent builders guarantee in place, just in case something does go wrong.
This will help you finish the build, and fix any defects, if something happens and your builder isn’t around to do so. Some mortgage lenders now require them before they will give construction loan finance. See our Third Party Builders Guarantees page for more information.