Building a home? Here’s what you need to know . . .
Common questions about contracts, finance answered
Build finance is a bit different to a home loan. The bank will approve you for a build loan and will advance the funds as the builder invoices for progress payments.
Every year we help many clients enter into contracts to build their dream home. Here are some of the most commonly asked questions:
1. What is the difference between buying turn key or a land and build package?
Turn key is where you buy a new build but the builder makes most of the design and layout decisions and is selling the finished product. The good thing about this is apart from the initial deposit, you don’t pay anything until the build is complete and you have the keys. They don’t usually have price fluctuation clauses as the builder tends to take the risk on price fluctuations.
With a land and build package, you enter into two separate contracts: a standard agreement for sale and purchase for the land and a specialised build contract for the house build. With a build contract you get much more say over what sort of house you want to build. You pay for the land in full but the build is usually by progress payment.
There are set milestones laid out in the contract as to when these payments are due. In these types of contract you take on the risk of price fluctuation.
There is also the potential that a builder can get into financial trouble during your build. This is where things like insurance or a Master Build guarantees can protect you.
2. What does practical completion mean?
Practical completion is a term set out in your contract that means when the build is practically finished but a Code of Compliance Certificate (CCC) has not yet issued.
The contract will set out whether you or your builder are responsible for obtaining the CCC.
You will need a CCC in order to get insurance and to change your mortgage from build finance to a home loan. If you are using bank lending to fund the build, your bank will usually require a copy of the Code of Compliance Certificate before making the final payment.
3. How does finance work?
Build finance is a bit different to a home loan. The bank will approve you for a build loan and will advance the funds as the builder invoices for progress payments. These loans typically last for one year from date of approval until the final payment is due.
This can be risky in the current climate as the house build may not be completed within the year and you may need to try and get another approval. Keep this in mind when you are signing up your contract as you may have to go through the approval process with your bank again and your financial circumstances may have changed in the meantime.
4. How do the defects and warranty period work?
A defects period is about defects in the build that the builder needs to remedy. This can include things like doors not closing properly, paint that needs touching up, or maybe the kitchen bench got scratched during the installation and needs replacing. The defects period may be anywhere from three to 12 months after practical completion.
Warranties are about the materials and equipment installed at your property and the guarantee period. For example, the roofing material and how long the company says it will last without a fault occurring. New builds generally come with a 10-year guarantee; however, some materials and equipment have shorter warranties.
There are some key things you can do to ensure you get any problems sorted.
Complete a thorough inspection with the builder at the practical completion stage.
You and your builder will note any issues and get these resolved.
Make a note of when your defects period ends and make sure you notify any issues in writing before it expires.
Ensure all warranty paperwork is correctly filled out by practical completion because it may be hard to locate a tradie later. Make a note of when all your warranty periods end so you can make a claim if you need to.
5. How do fluctuations work?
price
Just because you have a fixed price contract doesn’t mean the price can’t change. Because of Covid-19 and issues with the supply chain, many materials are delayed or unavailable. This can cause your price to increase as you may have to substitute materials for more expensive products or have delays while you wait for materials. There will be a clause in your build contract stating how price increases work. It is important you know the process and have a contingency fund if it happens.
6. What if I want to change something?
Changes to a plan can be costly and can also result in delays for your build. Your build contract will show you the plans for your house. We recommend that you physically measure out the space of each room and compare it to that particular room in your current property so that you have an idea of how big your new home will be.
It will also list the specifications of the build, right down to the taps and the door handles. If you do not know exactly what you are getting, ask for photos or links to product websites so that you can see. Anything that is changed after you sign the agreement comes at an additional cost to you for the builders’ time, along with any variation to the material cost.
Building a new home can be an exciting but also stressful time. Make an appointment to see us early on so that we can take the stress out of the process and you can focus on enjoying your new home.