Open eyes prevent new build headaches

It's the Kiwi dream for many families ... a new house built to their specifications. But one of the trickiest things for purchasers who want to buy land and have a home built is finance. Buyers must go in with their eyes wide open or they could end up in a financial mess.

The big question is where does the cash come from? This is a problem for some potential new build buyers. If you don't have a few hundred thousand bucks sitting spare in the bank, finance can be a problem.

It's important for buyers to ensure they have money sorted for the progress payments before you sign on the dotted line, says Geoff Bawden, of Bawden Consulting.

Typically the builder will require a deposit, 5 per cent when you sign the contract, another 10-15 per cent when the first sod is turned, further payments when the slab is laid, the walls go up, the roof goes on, the windows go in and so on.

Banks understand this and will release tranches of money. The trouble is those requirements for periodic chunks of money don't always marry with the milestones when banks are prepared to pay.

Builders need money to pay for the build but, because the house hasn't been built, there is no security for the bank.

If the borrower defaulted, the bank couldn't get its money back by selling the property. Catch 22. To avoid this situation, says Bawden, borrowers need to get independent mortgage advice.

"If they go to the bank they will get only one opinion. What one bank says may be very different from another."

The more equity you have to borrow against, or cash at the bank, the easier it is, he says.

The simplest way to buy a new home is to sell the old one first and release equity, providing you don't want to keep the old home as a rental. Some people rent for a period and others have even been known to live onsite in a caravan, Grand Designs-style.

Belongings can be put into storage, which costs money, but is a lot cheaper than a bridging loan.

Do check with the builder first. If it's a new subdivision, the developer may say that living onsite in a caravan isn't allowed.

The other option is to get a bridging loan or a specialist residential construction loan from organisations such as NewBuild, which works with Sovereign Home Loans.

The NewBuild loans require buyers to pay only a 5 per cent deposit on the land. Nothing more is paid until the new home is built. NewBuild manages the construction loan, which can reduce stress for the home owner, and carries out building inspections during and at the end of the build.

If the existing home is a rental, NewBuild funds up to 100 per cent of the land and build, which banks typically can't do.

Being able to capitalise the loan payments in this way and not pay until the build is complete reduces stress, but costs more in the long run.