Building a New Home: Construction Loans vs. Turnkey Builds

Welcome back to the Advanced Mortgage Solutions Podcast with your host Joel Sadler and expert Scott Miller! In Episode nine we delve into the world of building a new home and explore the various lending options available. 

Scott, with over 20 years of industry experience, breaks down the differences between traditional construction loans and the more modern turnkey builds. 
Learn about the pros and cons of each method, their impacts on your finances, and key factors to consider whether you're a first-time home buyer or a seasoned investor. 

Tune in for valuable insights and tips to make informed decisions on building your dream home!

00:00 Introduction and Welcome
00:27 Understanding the Home Building Process
01:51 Construction Loans Explained
02:50 Turnkey Builds: A Modern Approach
03:26 Comparing Costs and Benefits
05:28 Legal and Financial Considerations
10:36 Building for Rental Properties
13:38 Final Thoughts

For assistance with a new or existing home loan, reach out to Advanced Mortgage Solutions today. www.advancedmortgagesolutions.co.nz 

Transcript

SPEAKER_01 0:06

Hi everyone, welcome back to the Advanced Mortgage Solutions Podcast. This podcast is put together by Scott Miller from Advanced Mortgage Solutions, who is the founder and owner and he's our expert today. I'm Joel Sadler, your host. Today we're going to talk about building a new home and what are lending options. So Scott, who's our experienced advisor today, is over 20 years in the industry and has a professional background in logistics, management and finance. So technical knowledge plus real-world experience of owning property and helping hundreds of possibly thousands hundreds or thousands, Scott. Easily thousands of homeowners into their own home. It's magnificent. So, you know, buckle up, be prepared for some good information today. Scott, you know, there's so many nuances around building your home, particularly if you're a first home buyer. Let's start with that. Like if I really, really wanted to build my, you know, home, what would my options be for lending and how does that side of things work compared to just going and bidding on a home or putting an offer on a home that's already existing, you know? Question.

SPEAKER_00 1:12

Um look, there's two different ways to build. Um, one is more the old-fashioned way, it was called a construction loan. What would happen is you'd you'd go out and you'd buy a piece of or you'd buy a section for yourself, um, and then go out to say four or five builders and get some quotes and then pick on who, you know, whose land you like the most, and and that might be derived also around cost. Uh, and then what would happen is through the build, um, you would get drawdowns come as the build was being as the house was being built. So for example, you know, the the house's slab was put down, um, the sort of the builder would come put his hand out for a payment up, the walls would go, the roof would come on, then there'd be a handout payment, waterproofing, you know, internals. All through and what would happen is over the time of the mortgage, you would find that it increases in repayments that have to be made as each payment to finish the build was being made by the bank. Yeah. Uh the more modern way of doing it is something called a turnkey build. And this is where you negotiate a price for the completed build. Um, you know what section and you know what's going to be built on there because that's what you've agreed to. Um, a very small deposit um is required up front, maybe five or ten percent, depending on which builder you're talking to. Uh, and then there's no more repayments until the build is completed. The code of compliance is received from council to say that it's now ticked off and livable, um, and then your mortgage kicks in. Much more the first home buyer-friendly, the second option. Uh maybe a fraction more expensive. Not a lot more expensive, but you've got to understand that the builder has to cover all the costs of materials and labour and all the things to to build the house. Um, they have to cover that cost through the build period. Where under the more traditional way of building, they would get um payments for the work that they'd done at certain points of the of the completion of the build, like I explained.

SPEAKER_01 3:16

I I see what you mean. So that so by doing it the second way, they might the actual overall cost might be a bit higher because they have to factor in their lending, their lending to carry them through. Yeah.

SPEAKER_00 3:25

What we have found is some builders that can't afford to do a turnkey might exaggerate those prices to scare people into doing the more traditional type of build. Um, but when they get to a builder that does both, say, you know, the construction type or the turnkey type, you can certainly do that back-to-back pricing and find that it's not that much more expensive. But the advantages are huge. Um the not paying for a mortgage while your house is being built is a godsend because a lot of people are renting at the same time. And now not only are they paying the rent, but they're having to pay a mortgage for a house they're not even living in yet. And that be can become very expensive. So this is where this turn care model certainly comes in. There's some other um advantages that aren't as clear cut. Um, one would be that if heaven forbid the builder went under through the build, um, then you've only paid a small deposit up front, you know that it's going to be picked up by the market build or a certified builder's guarantee, but that can take months, right? That can take months until they put another builder in place to finish the first builder's job. Um whereas if you're three-quarters through your build and then the builder goes under, for example, you might have hundreds of thousands of dollars already in a mortgage that you're paying in a house that's not being completed for months and months until they can find another builder to complete it. So it's a sort of a an advantage that not a lot of people think of, but there's a few more protections in place for that turnkey type of purchase rather than the construction loan. On affordability, there's also a difference. So with a construction loan, because the lenders are aware that in the fine print of the fixed price contract, there's something to say that this might go up by 10% in a fixed price contract. Well, hang on, what's going on here? You know, what why call it a fixed price contract if then it can be changed? It most certainly can be changed. The banks are aware of this. So as part of their initial assessment, they will do a 10% overrun as part of the affordability to make sure that if there was an overrun, you could afford the overrun. It doesn't pre-approve you for an overrun, it just allows them to know that if it would happen, then they're covered themselves and know that the applicants wouldn't put into a position of uh financial hardship. Obviously, with a 10 key, you've already negotiated the price. So if materials or labour goes up significantly within the build, it's actually a problem the builder has to deal with, not the first home buyer or the purchaser of that house. So again, and with the assessment, there's no overrun on the assessment because the bank only gets involved with the build right at the end of the build when the house is completed and code of compliance has been issued. So three major advantages of having a turnkey build over a construction loan now right here.

SPEAKER_01 6:27

Wow. And the other thing that rang um rang in my ear pretty strong was the the deposit amount. You said between a five to ten percent deposit required potentially to put down as opposed to say, well, you know, buying the land which seems yeah, um yeah, a lot of places, a lot of times they can only afford the 20% deposit just to buy the land, you know, because for a land purchase you have to have twenty percent.

SPEAKER_00 6:53

Even though by the time the whole build is finished, it can be as little as little as 10%. So the bank would just take a wee bit of equity out of the section that you've purchased to finish the whole build, you've still got a mortgage to pay.

unknown 7:05

Yeah.

SPEAKER_00 7:05

On a section that's not even started to be built yet. So again, if you're renting at the same time, it can turn out to be quite expensive.

SPEAKER_01 7:13

Yeah. Yeah. So it sounds like it sounds in summary, I mean, you I mean, your your advice to anyone really, well well, to correct me if I'm wrong, but it sounds like the turnkey, if you're really adamant on buying uh building your home, whether it's first home or not, uh the turnkey option is definitely the easiest route to go. Um, and be wary of the I suppose construction route where there's a whole lot more stress potentially and having to manage, you know, builders and relationships and all that as well, which can add a lot of stress and grey hairs used a pun to the to the process, would that be fair?

SPEAKER_00 7:50

I mean, I'm I'm yeah. Construction loans have their pace, they certainly still do have their pace. But particularly, I mean, the the initial round of podcasts are around first home buyers more than anything else. So that's where we're sort of more focused at this stage. And and first-home buyers are generally more vulnerable. They don't have never paid a mortgage before, they haven't paid rates or insurance before, they've got no idea about maintenance costs. You know, so to do a construction loan um where there's ongoing costs through the build versus turnkey, it would certainly be more first home buyer friendly to do the turnkey option rather than the construction loan option. I'm not saying don't do the construction loan option, but if for a first home buyer, it would certainly um make the process a lot, lot easier. Yeah.

SPEAKER_01 8:37

Yeah, yeah. And and through either, so even so the the turnkey excuse me, the turnkey build option, I imagine from the legals point of view, it's quite simple, you know, a lot simpler where the construction loan does all do all of those things have to go past and signed off by lawyers and all that sort of stuff as well. So each time.

SPEAKER_00 8:56

Well, the turnkey, there is no progress payments, right? So we're not going to a bank and and showing them the fixed price contract that they originally signed with the drawdown schedule on it. And some banks say, okay, so the drawdown for the roof on was $54,000. Why have we received a bill or an invoice for $56,500? Yeah. What's happened? Why is it no? And the world comes to an end until you can sort of explain to um the bank why they there's actually a higher payment. Funny enough, even a lower payment. So we use the same, you know, $54,000 was expected, but you only get an invoice for $50,000. What's happened? Why is it only the the banks will easily um sort of go into the same need for detail on uh on an invoice that's lower than expected um and higher than expected. So they just want to know why there's this change. A turnkey, there is no drawdown. You're waiting to the end, and then you buy the house for the agreed price that you agreed to right at the start of the process.

SPEAKER_01 9:56

So yeah.

SPEAKER_00 9:57

Brilliant.

SPEAKER_01 9:58

Sounds a lot easier. Um, and then you know, um building a home uh to live in it yourself is one thing which we've kind of covered off there. But if you're building one as a rental property, with you know, whether it's your first, you know, see where you're heading with this, Joe.

SPEAKER_00 10:13

I see where you're heading with bus. Look, um deposit changes, yeah, deposit amounts do change. Uh and it comes down to, you know, the the overall intention of why you're building.

unknown 10:24

Yeah.

SPEAKER_00 10:24

Owner occupied or rental.

SPEAKER_01 10:26

Yeah.

SPEAKER_00 10:27

So yes with the owner occupied, you know, you can go as little as a 10% deposit across the completed build price. Um, obviously you can go more. Um, the banks will always like more deposit, but you can go as little as 10. Um when you buy a rental that's existing, uh the banks uh now uh need to have a 30% deposit to buy a rental that's existing. But to encourage helping out uh, you know, the the housing crisis in New Zealand, the lack of housing compared to people looking for homes. Um the government came out with uh if you build a rental, then they only need a 20% deposit. And that's to encourage new stock for people to then you know be on the market to rent. So there's an advantage of building a rental because you only need a 20% deposit versus buying an existing rental where you need a 30% deposit. So really good point to make out. Um and again, it comes back to they don't mind how you build that. It could be a turnkey build, like we explained before, but you'd need a 20% deposit, or it would be a construction lane, we'd still only need a 20% deposit. But again, I'll say it one more time. If you're buying an existing property and turning it into a rental, then there's the expectation of a 30% deposit. Right. So something out there for investors. Uh, and it's a good thing, I believe, because you know, investors also um like the idea of having something that's brand new because it means that their proposed maintenance costs for owning that property are probably going to be very low for the first 10 years of its age, you know, to lower those kind of expenses, and that's what property investing is all about.

SPEAKER_01 12:10

100%. And for those that are interested on the you know, uh rental property maintenance side of things, we did a well, Scott spoke to really um wise advice in a uh property investor podcast episode, which I think is two episodes before this, around that, around the you know, potentially um being caught with holder housing stock and whole lot of maintenance issues that can crop up, where I suppose if you're building something, you can choose to choose something where not only is it low maintenance because it's new, but the material can last longer than other materials.

SPEAKER_00 12:41

Latest technology, warm in the yeah, warm in the winter, cool in the summer. Yeah, you're gonna get a higher rental return from a potential um tenant because it's brand new. Yeah, yeah. And yeah, and like I was saying, you know, it's a 20% deposit, not a 30% deposit. So very good option out there.

SPEAKER_01 13:00

Yeah. Okay, Scott, is there anything else that you can think of that you want to talk about, you know, building your own home at the stage?

SPEAKER_00 13:07

Or we're if you do go down the construction route, um, you know, there's out of all of the types of lending that that banks give, building through a construction loan is probably the one that has the biggest variances between the lenders. So some lenders put a lot of hurdles in the way to build, which sort of indicates to me that they're not that keen on builds, where others make it a lot easier. So when you're talking to your mortgage advisor, you know, ask them, hey, we are looking to build either through a construction loan or a turnkey. You know, particularly on the construction side of things, you know, what lenders uh maybe perceive to have a product that would run more smoothly than others. Um, because there is quite a big difference between what the lenders offer out there. With the turnkey option, look, it's all pretty much the same because as far as the banks are aware, they're just buying a house that already exists. You know what I mean? They they don't get involved until it's all that you win. So they it's just like buying an existing home for them. But the construction, there's quite a big difference between different lenders.

SPEAKER_01 14:15

Yeah. Interesting. Awesome. All right, Scott, um, look, if someone wants to get hold of you or your team to for advice and help on a build, um, whether it's the first one or or tenth one, what's the best way for them to reach out and and get the process going?

SPEAKER_00 14:31

Always, you know, it's a bit of a sign-off for us now. You know, we we do sort of point towards the website. Um, there's all sorts of tools on there, calculators on there, contact forms, investment buyer forms, there's pages on how to build the differences between construction loans and turn keys. So, yeah, the number one point, yeah, go to you know advancedmorbid solutions.co.nz um and it gives you the ability of contacting us as well when you've made your mind that you're ready to push the button.

SPEAKER_01 14:58

Yeah. Alright, Scott, thank you to all our listeners. Uh, we'll see you on the next episode and um have a great day. Thank you.