Building, developing or subdividing? Getting the right finance matters.

Building a new home, developing a property or undertaking a subdivision can be exciting opportunities—but the finance required can be very different from a standard residential mortgage. 

Insights with Infinance by Brian Coogan 

For a new home build, a construction loan is generally drawn progressively as the project reaches agreed milestones. Rather than receiving the entire loan upfront, funds are released for stages such as foundations, framing, lock-up and completion. Interest is generally charged on the amount actually drawn. 

One advantage for new-home buyers is that new residential construction is exempt from the Reserve Bank's standard LVR restrictions. This can allow lenders to consider applications above the traditional 80% LVR threshold, although individual bank lending policies still apply. 

Banks will assess factors including income, existing commitments, deposit or equity, the building contract, builder, valuation and the expected completed value of the property. Low-deposit lending may be available in suitable circumstances, but approval is never automatic. 

Development finance is different 

Once you move from building your own home into property development, the lending assessment becomes considerably more focused on the project itself. 

Lenders may look at the developer's experience, equity contribution, feasibility, planning and consents, construction costs, valuations, expected end values, presales and the proposed exit strategy. 

Development finance can potentially cover land acquisition, construction and associated development costs, with funding usually released progressively as the project advances. 

This is where non-bank lenders can play an important role. They may have greater flexibility than mainstream banks when dealing with experienced developers, unusual projects or applications that don't fit conventional bank policy. However, this flexibility can come with higher interest rates, fees and different LVR or loan-to-cost requirements. 

Whether you're building one home, subdividing a section or developing multiple properties, getting the finance structure right before committing to the project is critical. 

At Infinance, we compare bank and non-bank options and help structure finance around the project, the numbers and your circumstances. 

For more on the above, go to www.infinance.co.nz/insights 

Written by Brian Coogan, Licensed Financial Adviser and Director at Infinance – Taupō 

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