How does a home loan for a new build work in NZ?
A construction loan is approved up front but paid out in stages as the house is built, rather than in one lump at settlement. Each progress payment goes to the builder after the work for that stage is checked, and the final payment is released once the home has its code compliance certificate. You usually pay interest only on what has been drawn so far.
That is the main difference from buying an existing house. With an existing house the bank values a finished building and pays the whole amount on one day. With a new build, the bank is lending against something that does not exist yet, so it releases money only as the asset appears.
What does the bank want to see before it approves a construction loan?
A signed building contract, ideally fixed price, with a payment schedule; the plans and specification; evidence of the building consent; and a registered valuation of the finished home. The bank is checking that the contract price plus the land is covered by what the house will be worth and what you can repay.
ASB, for example, says it needs a registered valuation at the beginning of the project and a registered valuer's completion certificate when the work is finished. Lenders are generally more comfortable with a single fixed-price contract for a finished, ready-to-live-in home than with cost-plus or labour-only arrangements, because the total is known.
If your contract has large PC sums or provisional items, expect the bank to ask about them. A PC sum that is too low is a cost the bank cannot see, and it lands on you mid-build.
How are progress payments released?
Against the milestones in your building contract — typically deposit, foundation, frames, roof on, lock-up and completion — usually after a registered valuer confirms the stage is done. ASB notes that with a registered Master Builder or Certified Builder on a fixed-price contract you may be able to draw payments against invoices without a valuer's visit.
Match the contract's payment schedule against the build stages before you sign. A schedule that asks for more money than the work done at each stage — front-loaded — means you are funding the builder ahead of the house, and that is the risk the bank's valuer is there to catch.
Do I need a 20% deposit for a new build?
Not always. The Reserve Bank has treated lending for the construction of a new home differently from lending on existing houses since it introduced loan-to-value limits in 2013, so a lower deposit can be possible on a new build. Each bank still applies its own criteria, so the deposit you need is set by your lender, not by the rule.
The details of the Reserve Bank's limits change from time to time. Ask your bank or a mortgage adviser what deposit they need for a new build with your contract, and whether the timing of the loan commitment matters (it usually needs to be before or early in construction, not at the end).
Will I be paying a mortgage and rent at the same time?
Often, yes, for the months of the build. Interest is charged on the amount drawn so far, so it starts small and grows with each progress payment, while you are still paying rent or your current mortgage. Budget for that overlap before you sign, not after the frames go up.
Some lenders set a deadline for principal-and-interest repayments to start after the first drawdown, so a slow build costs you twice: more months of rent, and repayments that start regardless. Ask your lender what theirs is.
What protects my deposit if the builder fails?
A build guarantee, if the builder has bought one for your job. The Master Build 10-Year Guarantee and the Certified Builders Halo guarantee both cover loss of deposit and non-completion. Some lenders want that protection in place before they lend; even where they don't, you should.
Check that the guarantee has been taken out on your specific project, not just that the builder is a member. Our guide to what Master Builders and Certified Builders actually cover explains the difference.
What should I sort out before I talk to a lender?
Have a realistic all-in budget: land, build contract, site works, council development contributions, consent fees, service connections, landscaping and a contingency. The build price is only one line of it, and the bank will lend against the whole picture.
Our build budget calculator adds up those lines for your region, and the cost-to-build page shows what a square metre costs by region from Stats NZ consent data. This is general information, not financial advice: talk to your bank or a registered financial adviser about your own loan.