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Building a house is a little bit different to buying one, not surprisingly the money matters surrounding the experience are different too.

There are some key money related things to know if you are considering building your home (apologies for those from outside of Australia – some of this may not be relevant to you):

First home owners grants
In Australia (and each state is different) there are incentives offered by the government to encourage buying/building new homes, if you are a first home buyer (refer to this site for the current details of this scheme). At the time of writing this in Victoria, the Australian Government would provide close to $30,000 towards your new home if you were a first home buyer, building a new home in regional Victoria – how good is that!

– $7000 federal first home owners grant (as long as the value of the house does not exceed $600,00);
–  $13,000 new home bonus (only if building a new home);
–  A further $6,500 if building in regional Victoria (this is only for contacts signed before 30 June 2011);

Make sure you check out what grants you may be entitled to, unfortunately this was not an option for us with our home.

Banks and loans
If you need to borrow money to build, determining your budget is an important first step. Refer to my previous post about determining your building budget to help you do this. The first thing a bank will ask you when you go to see them is “How much money do you want to borrow?”. If you haven’t factored in everything required to complete the house (landscaping, fences, window furnishings and driveway) you could come up short with funds post loan approval.

The land loan
If you have found your land, but not finalised the building side of things you will approach the loan for the land like you would for buying a house. Gain pre-approval from the bank for a loan amount to cover the land. It is also a good idea to get pre-approval for the total amount you think you might need to build the house as well. You don’t want a situation where you have bought your land, and the bank won’t lend you the amount you need to build the home you want. You will make your offer on the land, the agent/sales person will accept the offer (on behalf of the vendor/developer), contracts will be signed and a deposit paid (we paid a 10% deposit). These signed contracts will then be used by the bank to process your loan and send the balance of payment to the agent/solicitors to finalise the purchase of the land at settlement. The bank will send a valuer out to the land to verify it is worth the amount you have paid for it (all very straight forward and normal for a property loan).

We didn’t do a house and land package, so I am not in a position to comment on the process there. The large building groups that do these type of packages can walk you through this process, often they will have their own finance options/affiliations you can look into using.

Stamp Duty Savings
The other bonus when building, as apposed to buying, stamp duty is only paid on the land value – stamp duty is not paid on the value of the house you are planning to build. So if you get a good deal on your block of land, or buy in a regional area (where the price of land is not as high as the city), you will save quite significantly on stamp duty.

The house, landscaping and other bits
When borrowing to build a house it is not as straight forward as buying land or an existing house. You don’t tell the bank how much you want to borrow, they give you the money, then you decide how to spend it (wouldn’t that be nice!). You will need to do a lot of work with your architect/builder first, and provide a copy of the following to gain loan approval from the bank (this was what was required by our bank – this may vary with other institutions):

– signed building contract with the final contract price to complete the house (you will have decided on your builder, and completed all the details for your house plans, and signed the contract with them);
– approved building plans (approved by the council and stamped/signed on every page by them),
– a building permit issued by your council;
– copy of the certificate of currency for domestic building insurance (the builder provides this)

The bank will need copies of all these documents to pass onto their back office to use in the approval process.

You will also need rough estimates (ball park figures you determine) for the other work that will also be covered by the loan eg. landscaping, driveway, fences (that are not covered in the building contract). You may want to include these costs in your loan total too, if you don’t have the money in the bank to cover these yourselves.

Once the loan amount has been decided and approved (including all your extras mentioned above), the funds do not get released until the builder has invoiced you for completion of a formal stage in the building process. These stages are referred to as progress payments. These invoices are then forwarded onto your bank and they pay the builder directly – subject to a formal inspection and approval of the work that has been completed.

Progress payments are usually made at the following stages (according to our bank):

Stage                       $
Slab down/base    15%
Frame                     25%
Roof On                  25%
Lock up                   15%
Completion            20%

However our Builder structured the progress payments a little differently:

Stage                       $

Deposit                     5%
Base Stage             10%
Frame stage           15%
Lock up stage        35%
Fixing Stage          25%
Completion           10%

Most banks will have forms you must complete and submit at each payment stage, along with the builders invoice.

Independent Inspections
One of the things we noted during our research was the importance of having an independent inspection undertaken at each building stage (before progressing any further). Unless you are a qualified builder, do you really think you would be able to pick-up on something that is not constructed to industry standards? We didn’t feel comfortable relying on our limited construction/building knowledge at each site inspection, so we looked into getting someone to do this for us. It was going to cost between $500 – $1000 to get an independent building inspection completed by a consultant – each time! We were pleasantly surprised when Pivot told us that they organised independent inspections at the completion of each stage with Building Ethics Australia (BEA):

Quality Assured
BEA understand how a good builder should operate. They check their builders carefully before they can gain accreditation. This check involves a financial check and they speak to a number of their previous clients. Only competent builders become BEA Accredited Builders, which guarantee’s you a first-class job without all the worry and stress that comes with being in unfamiliar territory.

Independent Industry-Leading Inspections
BEA’s Quality Assurance Program provides the highest level of consumer protection in the industry today.  BEA Accredited Builders subject themselves to critical independent site inspections during the construction of a home at every progress payment stage. BEA builders agree to not being paid for any stage other than deposit until BEA has inspected the work to ensure it meets industry standards.

Protection & Peace of Mind
When you appoint a BEA Accredited Builder, you only make progress payments after having received confirmation from BEA that the work meets the industry standard. This confirms that an independent inspection has been carried out prior to each progress payment stage, verifying all aspects of your building project meet the prescribed industry standards.

Additionally, in the unlikely event of any dispute between the builder and client, BEA is there to offer independent assistance in resolving the issue.

Once BEA have completed the inspection, and are happy with the work completed, they issue an Authority to Pay Certificate to Pivot, who send it on to us, to forward to the bank. My understanding is that the bank would organise an independent inspection of the house build at each stage if Pivot didn’t already use BEA – after all, they need to ensure they protect their investment (it’s the bank’s funds that are building the home!).

The experience with our bank…Members Equity

We chose to move all our banking over to Members Equity (ME) when we sold our house in Melbourne, we were looking for a different bank for our personal banking and new property loans. Previously we were with one of the large banks, and didn’t find their customer service or the fees charged particularly appealing.

We chose members Equity because a friend’s husband worked there, and informed us of the 0.5% rate reduction we would get if our Superannuation was with an industry super fund (who own ME Bank). Members Equity has only been around since 1999.

“From day one, ME Bank’s goal was to give industry super fund members better value banking and better service with a no-nonsense approach to borrowing and with products that were simple, straightforward and offered value-for-money to working Australians.All with low or no fees, low interest rates and higher returns built in for industry super fund members.”

That’s exactly what we get, and they were one of the few banks who didn’t put rates up recently when all the other major banks did.

I cannot fault the personal service we have received with Members Equity. From the initial discussions seated at a desk with a consultant (over a latte they provided!), to the personal phone calls to give us updates, and to tell us our loan was approved – the entire experience has really blown us away. Even Pivot builders can’t believe how quickly Members Equity process the progress payments – within 24 hours!! It’s perfect to keep the ball rolling on the house build, avoiding stops and starts. We have the phone number and email address for our loan manager, allowing us to deal directly with them – it’s brilliant. I never thought I would speak so positively about a bank.

Also, we weren’t forced to take a loan package with offset accounts, Visa cards and a whole lot of things we didn’t need. We just wanted a loan, access to internet banking and good service!

This post has been jam-packed with lots of info… I hope it hasn’t been too overwhelming? All these topics are linked in some way, so I thought it best to cover them together.

Cheers,

Bernice
www.heybernice.com


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