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By Kirsty O’Hara
In this article, Velocity Financial Client Service Manager, Kirsty O’Hara, gives her top ten tips for anyone looking to build their dream home.
10 minute read
Are you dreaming of building a bespoke architectural house? So do lots of our clients. We deal day in, and day out, securing finance for construction lending and there are a few tricks we have learned when it comes to factoring in costs on new builds. Below are my top ten tips for anyone looking at building a new home.
Before offering on a section, be sure to understand the natural hazard zoning for your plot of land. The common zoning considerations to look out for are wind, flooding and earthquakes.
In Wellington especially, the higher the wind zone, the higher the engineering requirements and design restrictions. The wind zone should be noted on the LIM report for your section and will be the first thing your architect looks up before initial designs begin.
If considering land in an ‘Extreme Wind Zone’ – be aware that your structural engineer may self-declare some aspects of your house to be in an SED wind zone. SED stands for ‘Special Engineering Design’ and requires custom engineering and peer reviews. These things add to the cost, and can translate to a lot of steel, concrete and pile work that would not normally be required on a flat site, in a city without wind or earthquakes. Engineers on these terrains can sometimes get nervous during construction and make additional design changes whilst the house is being built. Wind zones also can restrict glazing options and balustrade designs, to ensure compliance with engineering requirements.
Specialised engineering to meet zoning requirements add to the cost of your build
Other sites, while not in a wind, flood or earthquake zone, may have other factors to consider – such as easements, or covenants, on the land, that restricts what can be built and where. Talk to your lawyer before purchasing land to ensure no surprises.
We always suggest to pre-purchasers that they consult their lawyer, architect and engineer about the best time to order a Geo-tech report. There is no perfect time order this, and there can still be surprises when you start moving dirt. That said, a Geo-technical is conducted by a Civil Engineer, and helps you to make an educated decision as to what’s happening under the grass. Choose a Geotech company, such as ABUILD Consulting Engineers that is reputable, knowledgeable, and realistic about what scope of work is required for your Structural Engineer and Architect - to be informed regarding the soil and ground conditions, before they start the design process.
Remember, hill sites generally are more expensive to build on. Just because there might be flat building platforms within the terrain of a section, that doesn’t mean the house will be engineered as if it is on flat land. Any section at the top of a ridge line will be designed as if it were on a hillside. This is to ensure the house doesn’t go sliding – which makes sense given no client wants to ride their house down a hillside!
Before offering at tender on a ridgeline or hillside section, talk to an engineer about likely pile requirements that may be likely to plug a house into the hill, to make sure nothing will send your new home sliding. The illusion of ‘flatland’ will surprise you when it comes to engineering requirements in earthquake and wind prone areas.
Before offering at tender on a ridgeline or hillside section, talk to an engineer about likely pile requirements
Architectural contracts
This may seem like a given, but we recommend your lawyer checks your Architect’s contract. Be wary of a contract structure, where your architect is paid as a percentage of your construction cost. It’s not uncommon for Architects to be paid approximately 9-11% of the total construction cost for your project. The best practice in early negotiations is to agree on a cap on this percentage-based fee, otherwise you may find that your architect profits if your build goes beyond your original budget (especially when they recommend Italian tapware!).
Consider agreeing on a cap for percentage-based fees
The other thing you want your lawyer to check is the amount of design cover included under the architect’s public liability insurance. Make sure these two aspects allow for any potential construction inflation, before signing the Architects contract.
When you receive your builder’s quote for your job, ensure that this contract is seen by your lawyer for commentary and advise, before signing. Your bank should approve a draft copy of the builder’s contract to ensure that it is happy with the progressive payment schedule, and any guarantees your builder is proposing. If your bank wants the payment schedule refined, it’s better you negotiate this with the builder, before signing your fixed priced contract. Knowing that your finance is unconditionally approved is in your builder’s best interest also.
If you are wanting to design a home on a budget, it can be worthwhile talking to your builder in the early design phases as to the realities of building the concept art you are considering. Keeping your design simple and practical can save money in the long run.
Keep roofing designs simple and practical to save costs
There are three main styles of rooflines you can consider on your new home – Gable, Mono-Pitch and a Hip roof. As a rule of thumb, Hip roof structures tend to be the most affordable to construct.
To save extra cost, avoid a complicated or mono-pitch roofline, and reduce the number of corners that need to be constructed.
All too often people think if they restrict their new build m2 to a humble size, that they can build for a humble budget. The reality of construction is that a smaller footprint doesn’t directly correlate to a cheaper build.
Sometimes small builds can cost more per m2 to construct
Sometimes small builds can cost more per m2 to construct. This is due to a lack of cost efficiencies over the full project, as well as the fact that each space must work harder to provide storage and spatial efficiency. Sometimes the better plan is to have a slightly larger floorplan, to achieve cost efficiencies through economies of scale.
Once you’ve decided to take the plunge and purchase the section of your dreams –you’ll probably wonder how the finance side gets structured. Often banks require you to put a 20% deposit on the land, and the bank will lend you up to80% of the ‘as is’ value of the land. This allows you to keep any cash reserves you have in savings aside to fund the design and consents process, as well as the early stages of construction.
The bank always requires that clients use their personal funds first towards construction once the build begins, and then when these funds are used the bank comes in to pay out progressively when invoices are provided from your builder for payment.
The bank always requires that clients use their personal funds first towards construction
This part of the process gets covered a little more in Tip #9 and is something your advisor can discuss in more details specific to your unique financial position and construction project.
Twenty working days will probably not be twenty working days, when it comes to getting your Building Consent approved through council. Requests for Information (RFI) are the norm on Building Consent applications, and these will come through in the weeks following your 20 working days. It can be a slow process as your architect addresses each RFI via the council’s consent portal. Keep this in mind for timeframes to tee-up your builder to start work on site an provide a realistic ‘time buffer’ where possible.
Vacant land can sometimes incur council development fees in the thousands
On the cashflow note, be aware that some councils (including Wellington City Council) may also charge a one off ‘Development Fee’ to build on vacant land. This is in-addition to the Building Consent Fee and can amount to between $6,000-$8000.
The development fee provides for the council’s cost of building new infrastructure on the vacant land, as well as towards providing parks, roads, and utilities in the area.
With the construction industry in hot demand, and delays in the manufacture and shipment of materials to New Zealand, be aware that once your Building Consent is approved, you may still have to wait for your builders to start work onsite.
Something else worth considering is budgeting for a buffer for construction inflation, if there is a long waitlist with your building provider.
Labour shortages and stress on supply chains are increasing construction costs
With this in mind, any Structural Engineer ‘Scope of Works’ that includes a fee proposal for overseeing construction will generally benefit from asking your engineer to lock or cap the hourly rate for these inspections.
The hard cold truth is that all banks prefer fixed-priced building contracts. A fixed-priced contract is where the builder quotes the project from start to finish and agrees on a lump sum amount that you will pay (unless there are any variances during the process).
Fixed-price contracts can work well as an incentive to the builder to finish on time and within the budget.
Banks prefer fixed-price building contracts
The second hard truth is that builders can be reluctant to provide fixed-price contacts, given that the risk sits with them. Furthermore, builders are currently able to pick and choose projects, due to the high volumes the construction industry is experiencing.
If you are considering a ‘charge up’ build, or ‘self-managed’ project, it can be a slow and frustrating finance approval process to get bank approval for a ‘labour only’ build (where some or all the build is client-supplied or client-managed).In instances where the banks do approve a project with client-supplied items or self-management, it is generally for clients who work in the trades or have other high-equity properties they can offer as security to provide a low LVR risk position.
Once approved, the bank will expect you to stick to the payment schedule originally approved by the bank – and any variances or cost overruns need to be self-funded during the construction process.
Factor in the cost of valuations during the construction process
Regardless of whether you go for a Fixed Priced Build or a Charge up project – the bank will require a valuation before approving your finance, to confirm the ‘as is’ and ‘upon completion’ value of your property. They will also generally require progress valuations throughout the process, at ‘Roof on’ Lock up’ and ‘Final Completion’.
On all construction lending (until the project is complete and a Code of Compliance issued), bank funding is commonly approved based on 80% of the value of the land value, plus 80% of the Build Contract. Banks also factor in a servicing buffer for cost overruns to ensure you have capacity to service any unforeseen costs. For this reason, standard lending servicing calculations generally don’t apply. Therefore, if you have had pre-approval to go house hunting before on existing dwellings, it is unlikely that this will translate into construction approval for the same dollar amount.
Much of this list has been focussed on monetary costs, however it is worth considering the personal stressors and joys of building your dream home. There’s no doubt that building a bespoke architectural home is100% exciting. Hopefully the excitement of creating your dream will carry you through the highs and the lows of a project, that requires patience and perseverance, and no doubt some hidden costs along the way. Here at Velocity Financial, we absolutely love supporting our clients through the building process. We share in their joy, as their ideas move beyond the paper to exist in the real world, and dreams are finally realised.
The excitement of creating your dream will carry you through the highs and the lows of a project
Land and Build packages
If you’re exploring the option of purchasing a land and build package, where the section comes with a pre-designed home, be aware that any changes you make to the design will mean it is no longer a pre-consented design. If this is the case, even though you won’t have the same level of architectural costs as a bespoke home, there will still often be architect fees to factor in, as well as council consent costs.
Tiny homes and factory-built options
Lastly, if you are thinking ‘Bugger the architectural house, let’s go down the prefab, tiny home, factory built, or pre-consented route’ … then keep an eye out for our upcoming article on The Pitfalls of Pre-designed and Tiny Homes (coming soon).
If you’re still curious to know more about construction lending, give one of our financial advisers a call. We specialise in construction approvals and can talk you through the process and the various build packages offered by banks to support individuals building residential homes.
Happy construction daydreaming!
Kirsty
Hi, I’m Kirsty. I’m a Client Services Manager in Brendon Ojala’s Velocity pod - which means I help welcome new clients, get applications to bank, make sure properties are accepted, ensure deals are approved, celebrate tenders won, ensure clients are confident at auctions, and best of all check in to make sure keys are smoothly handed over at settlement. I love my job because it’s fast paced, I’m working with fascinating people in an industry I’m passionate about, and no two days are the same. I love that I get to make sure people have shelter, and homes that they love to live in. It’s incredibly rewarding helping first home buyers secure their first property! I also have an interest in residential architecture, and love supporting clients as they build their family dream home. When I’m not at my desk you’ll find me enjoying time in nature, building an architectural house, playing games with my kids, or at a sports event. I like to dance when I’m cooking, and my home increasingly looks like an indoor jungle.
Disclaimer: If you are considering purchasing land or building a house, always work with your lawyer, financial adviser, architect, and engineers prior to purchase to ensure no surprises. The tips in this article are a shallow dive into the process commonly found whilst designing and building a house. Due to the nature of construction, and bank policy, each build is unique in its funding requirements and still requires full due diligence and specialist advice, tailored to that property. Before you make any decisions, discuss your situation with an adviser from Velocity Financial, and seek advice from professionals, such as a lawyer and accountant, to find the best solution for your unique situation.