Building loans: What are they and do you qualify?

Article summary

• A building loan is used to finance the construction of a house on vacant land, or to finance renovations on an existing home.
• Unlike a home loan; with a building loan the bank pays out the loan in stages, as each stage of the construction process is completed. 
• Ensure that your contractor is a registered member of the NHRBC (National Home Builders Registration Council), and is covered by Contractors All Risk Insurance Cover.

Wanting to build your dream house or revamp your home? A building loan can provide you with the finances you need to make it happen, as well as improve the overall value of your property, but make sure you go in with your eyes wide open.

What is a building loan?

A loan that can be used to

1. finance the constriction of a house on vacant land.
2. Finance additions and renovations to an existing home.

How does it differ from a home loan?

Applying for a building loan is similar to applying for a home loan, except that the bank does not pay out the entire loan at once.

Rather, the loan is paid out in stages. A portion of the loan is paid out each time a phase of the construction is completed.

How do I know if I qualify for a building loan?

You qualify if you meet the following criteria:

• You must be at least 18 years old.
• You must have a good credit record. You can use ooba home loans’ free, online tool, the Bond Indicator, to check your credit record. A good credit score is anything above 670.
• The finance must be used to build or alter a residential property.
• The contractor must be registered with the NHRBC (National Home Builders Registration Council) for all new dwellings.
• You will need to pay a deposit up front, which is usually 10% of the cost of the project. However, as with home loan applications, you have the option of applying for a 100% bond, which removes the need for a deposit but means higher monthly repayments.

Our recommendations:

1. Consult an architect to help you draw up plans for the building.
2. Consult an attorney to advise you before making an agreement with the building contractor.

Bear in mind the documents you’ll need to apply for a building loan:

• Provisional drawings, plans for the property, and a site plan. This can all be drawn up by an architect.
• A building contract, signed with the building contractor. 
• Proof of the builder’s registration with the National Home Builders Registration Council (NHBRC).
• A lien waiver provided by the builder. This basically means the builder is waiving all rights to the property and any materials and labour used in its construction.

Its the responsibility of the homeowner to ensure that the building company complies with the requirements of the bank.

Take precautions against property damage

• By ensuring the builder is covered by Contractors All Risk Insurance Cover. This protects the builder, the bank and the borrower from loss or damage.
• 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.
• Obtain home insurance once the construction is complete. ooba Home Loans offers a range of insurance packages.

A home in your own image

Whether you’re building a home or renovating an existing one; for all the costs and legal processes involved, in the end you get a home that has truly been forged in your own image. 

Before embarking on the project, you should get prequalified. This will provide you with an idea of what you can afford, and let you know if your credit score is high enough to get the loan approved.

You can get prequalified by contacting an expert at ooba Home Loans, or using our free, online qualification tool, the Bond Indicator.