Kiwis love a new build, and for many, it's a dream come true to secure a patch of land and create a home.
With recent market shifts and some frustrating industry hurdles, there are a few things to be aware of before embarking on a construction project.
New builds have been popular with investors over the last few years due to tax deductibility and the bright line test (requiring tax to be paid on any gains from the sale of residential property) period extending to 5 years.
Some lenders have been offering special rates (as low as 1.68%) for construction to entice first-time buyers and investors, but unfortunately, these low rates will likely disappear off the table soon. Interest rates are rising across the board, making it more challenging for some people to purchase a property.
The interest rate changes will undoubtedly affect those wishing to build new, but the good news for first home buyers is that there are fewer hoops to jump through with the banks.
It's a tough time to be building. Due to severe supply constraints and significant price increases on basic build materials, there are currently major construction delays across the board.
With the cost of materials rising unpredictably - often during the build process - builders are having disputes with clients over prices, and completion dates are getting pushed out by 6-12 months (or more).
Buying off the plans
Many first home buyers are attracted to "buying off the plans". Usually, a down payment of 10% to the developer is required with a wait time of 12, 24, or 36 months for completion. However, off the plan purchases need to be navigated carefully.
If you buy off the plans, you will sign a Sunset Clause, which states that if the developer does not complete the build within the specified time frame in the contract, they may sell the property to you at market value.
This clause is notoriously problematic. The developer and client agree on the price, the bank approves the lending, but if the build goes over time and budget, the developer can demand market value higher than the original price.
Though frustrating, completion delays are common and aren't the developer's fault. The best way to protect against this occurring is to address the Sunset Clause before signing the contract - always work with a good lawyer and extend the clause.
It's up to the purchaser to do their due diligence and engage a lawyer before signing off anything. An experienced home loan adviser will go above and beyond and help you through this process.
Work with a pro
With the ever-changing market and construction industry woes to navigate, it's never been more crucial to work with a professional home loan adviser before embarking on a new project.
Written by Paul Ejamme, Financial Adviser and Finsol Director.
The opinions conveyed in this article are for general educational purposes only to provide information about the financial services industry.
This information is not intended to provide specific advice or recommendations for any particular insurance, home loan, or investment product. You should not use this article to make any financial decisions, as we cannot assess your situation without thorough consultation.
We highly recommend seeking professional advice from one of our qualified financial advisers. Get in touch on 0800 346 765 or email email@example.com