The ins and outs of building loans

A building loan is used to finance the construction of a house on vacant land or to finance additions and renovations to an existing home. With building loans, it's important to bear in mind that a portion of the approved loan amount is retained by the bank and the funds are advanced to the borrower in stages as progress payments during the construction period.

“The bank will only make a progress payment against construction work already completed,” emphasises Etrecia Van Dyk, Provincal Sales Manager at ooba, South Africa's largest bond originator. “It's vital that you choose a contractor who is financially stable as he has to fund the purchase of building materials and carry out the construction work until the work has reached a stage where a progress payment can be made by the bank.”

Do I qualify?

If you're building a new home from scratch or doing renovations, there are many criteria that banks will look for when granting customers building loans. Firstly, you must be at least 18 years old and have a clear credit record. Secondly, the finance must be used to build or alter a residential property. 

In addition, the contractor must be registered with the NHBRC (National Home Builders Registration Council) for all new dwellings. Home owners also need to have cash in hand to finance the loan shortfall. As Van Dyk explains, “An upfront deposit, which is usually 10% of the loan amount, will be required by the bank from the customer to make up the shortfall.” This shortfall is the difference between the cost of the project and the amount granted by the bank.

What documents do I need?

“There are different documents needed at the various stages of the building process,” says Van Dyk. In order to apply for a building loan with a bank, you will need provisional drawings for your house, including plans, sections, elevations and a site plan. You will also need to show the signed building contract, a schedule of minimum specifications and finishes, a schedule of planning finishing dates and proof of the builder's registration with the National Home Builders Registration Council (NHBRC).

The home owner will also need to provide a waiver of builder's lien. “The waiver of lien is where the builder waives all the rights to the property, materials used in the construction of the dwelling as well as the cost of labour in favour of the bank,” adds Van Dyk.

What is a turnkey property?

“A turnkey property is a newly-built dwelling where the homebuyer takes transfer of the property only once it is fully complete,” explains Van Dyk. With turnkey properties, the property transfer and bond registration take place on completion of the property and the full proceeds of the loan are disbursed as there is no retention. “When the home is finished, the bank conducts an inspection of the property to ensure that it is fully complete before providing their bond attorneys with consent to register the bond,” says Van Dyk.

What is builder's all-risks insurance cover?

“This covers the builder, the bank and the borrower against any loss or damage that may be incurred during the construction period,” says Van Dyk. The policy covers fire, lightning, explosion, earthquake and storm damage, as well as theft of building materials. If the builder has his own policy, the bank requires a copy of the full policy wording as well as proof of South African Special Risk Insurance Association (SASRIA) cover. 

Once the construction of the property is fully complete, the bank will require proof from the home owner prior to authorising the final progress payment that a suitable building insurance policy is in place to ensure that the asset is insured for the replacement value determined by the bank.

Even though all building work involves some inconvenience and hassle factor, Van Dyk believes that the pain is definitely worth the gain when it comes to having an enhanced property value. “If you want to realise the underlying value of your property by doing renovations or if you want to make that dream home a reality, a building loan is definitely the way to go,” she says. “Just make sure you choose a reputable, registered contractor and that you have enough cash in hand to finance any shortfall amount,” she adds.

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